^''S^SSf' } SENATE -i Document 

^a ^iesstOH I I No. 538 



NATIONAL MONETARY COMMISSION 



History of Crises under the 
National Banking System 



BY 



O. M. W. SPRAGUE 

Assistant Professor of Banking and Finance in Harvard University 






Washington : Government Printing Office : 1910 



jr 



61ST Congress \ qi?matr' j Document 

2dSessi07i ] bENATE No. 538 



NATIONAL MONETARY COMMISSION 

History of Crises under the 
National Banking System 




or M? wj^p] 



SPRAGUE 

Assistant Professor of Banking and Finance in Harvard University 






Washington : Government Printing Office : 1910 



J 



CmVv,^" 



V 



^litffS, 






?y 



NATIONAL MONETARY COMMISSION. 



Nelson W. Aldrich, Rhode Island, Chairman. 

Edward B. Vrebland, New York, Vice-Chairman. 
Julius C. Burrows, Michigan. Jesse Overstreet, Indiana. 

Eugene Hale, Maine. John W. Weeks, Massachusetts. 

Philander C. Knox, Pennsylvania. Robert W. Bonynge, Colorado. 

Theodore E. Burton, Ohio. Sylvester C. Smith, California. 

John W. Daniel, Virginia. Lemuel P Padgett, Tennessee. 

Henry M. Teller, Colorado. George F. Burgess, Texas. 

Hernando D. Mone'/, Mississippi. Arsene P. Pujo, Louisiana. 

Joseph W. Bailey, Texas. Arthur B. Shelton, Secretary. 

A. Piatt Andrew, Special Assistant to Commission. 



JUL 23 1910 



m 



■3 






CONTENTS. 



Chap. I. — The crisis of 1873 

Bank loans, 1869-1873 

National-bank reserves, 1869-1873 

The concentration of bankers' deposits 

Interest on deposits 

The New York money market in 1872-1873... 

The outbreak of the crisis 

The closing of the stock exchange 

Government assistance 

The effect of the panic on the New York banks 

Clearing-house loan certificates 

Suspension in New York 



Page. 



2 

5 

15 

20 

24 
35 
38 
40 

43 
45 

The currency premium ^5 

Foreign exchange ^g 

Suspension throughout the country 61 

Hoarding ^g 

Pay-roll difficulties _ _j 

The domestic exchanges y. 

Bank failures g 

Analysis of bank returns _ 82 

The wise policy of the New York banks 89 

No change in banking methods 103 

Legislation after the crisis loc^ 

II- — The panic of May, 1884 __ j,^^ 

Failures and fraud jqq 

Clearing-house loan certificates n. 

Analysis of New York bank returns nj 

No equalizing of reserves 1 20 

III- — Financial stringency in 1 890 J24 

Central reserve cities J24 

New York reserves ^27 

Government assistance i^^ 

Final stage of stringency 14 j 

The banks and the government surplus 149 

III 



National Monetary Commission 

Page. 

Chap. IV. — The crisis of 1893 153 

Monetary and banking movements, 1890-1893 153 

The first stage of the crisis 162 

The second stage of the crisis 167 

The third stage of the crisis 175 

Suspension of payments 180 

The currency premium 186 

The causes of gold imports 191 

Suspension and hoarding 195 

The effect of suspension on trade 199 

The domestic exchanges 203 

No changes in banking methods or legislation 210 

V. — The crisis of 1907 216 

Banking movements, 1897-1907 216 

State banks and trust companies 224 

Elements of weakness in the New York money 

market 228 

The policy of the Treasury 230 

The ultimate reserve ^ — 2321 

Indications of approaching reaction 236 

The beginning of the crisis 246 

Trust company difficulties 251 

Unfortunate delay of the clearing house 256 

Explanation of the suspension of payments by the 

New York banks 260 

Resumption delayed unnecessarily 277 

The currency premium 280 

Foreign exchange 282 

Suspension throughout the country 286 

The domestic exchanges 291 

Loan contraction 297 

The condition of the banks 303 • 

Expansion of the circulating medium 314 

The Treasury and the panic 316 

Conclusion 318 

Note a. — Extracts from the Annual Report of the Secretary of 
the Treasury (William A. Richardson) relating to 

the crisis of 1873 321 

B. — Extracts from the Annual Report of the Comptroller 
of the Currency (John Jay Knox) relating to the 

crisis of 1873 332 

C. — Extracts from the Annual Report of the Comptroller of 
the Currency (H. W. Cannon) relating to the panic 

of 1884 345 



IV 



C ont en ts 



Page. 
Note D. — Banking reform proposals in New York in 1894: 

A. Address of George S. Coe 371 

B. Report of the committee of the New York 

Clearing-House Association 381 

E. — Clearing-house loan certificates in 1890 387 

F. — The Treasury and the money market in i8go 393 

G. — Bank failures and suspensions in 1 893 400 

H. — A. Clearing-house loan certificates in 1893 406 

B. Report of the New York clearing-house loan com- 
mittee 409 

I- — The Banks and the Panic of 1893. By A. D. Noyes . _ . 413 
■ J- — Report of the New York clearing-house committee, 

acting as a loan committee in 1907 428 

K. — Substitutes for Cash in the Panic of 1907. By A. Piatt 

Andrew 434 



HISTORY OF CRISES UNDER THE 
NATIONAL BANKING SYSTEM. 



Chapter I. 

THE CRISIS OF 1873. 

The crisis of 1873 was preceded by four years of general 
economic activity, which was by no means confined to the 
United States. In agriculture, manufactures, and trans- 
portation much real progress was made, but, as subsequent 
events proved, the pace was more rapid than was consist- 
ent with healthy development. Facilities for the produc- 
tion of many commodities were provided beyond the lim- 
its of profitable demand, and many enterprises which were 
enlarged upon a quite insufficient foundation of working 
capital went to the wall when subjected to the strain of 
crisis and depression.^ As in 1857, the most serious weak- 
ness was disclosed in connection with railroad building. 
Bonds often sold at a heavy discount had provided the 
means for building many roads which were in advance of 
any considerable population, and whose traffic proved 
insufficient to meet fixed charges. The situation of other 
roads was even more unsatisfactory. Before the crisis, 
construction had had to wait upon the slow sale of bonds 

a For the general economic situation both before and after the crisis see 
" The Financial Crisis in America," by Horace White, in Fortnightly Review, 
1876, pp. 810-829. 



National Monetary Commission 

or the venturesome advances of bankers, and after the 
crisis construction had to be discontinued altogether, 
leaving a large mileage connecting nothing in particular.*^ 
A long period of depression and recuperation was inev- 
itable, and its advent could not have been long postponed. 
But, as always happens, the exact moment of collapse was 
determined by particular occurrences and might have 
come a little earlier or at a somewhat later date. 

BANK LOANS, 1869-1873. 

The extent to which the banks may be held responsible 
for the unsound conditions which had developed before 
the crisis of 1873 can not be determined exactly. In mat- 
ters of this kind it is impossible to make a complete dis- 
tinction between causes and effects. The average quality 
of the loans of the banks must suffer if the general business 
situation becomes unsatisfactory. On the other hand, 
this condition may be in part a consequence of the failure 
of the banks to exercise sufficient caution in granting 
accommodation to borrowers. As will be seen later, few 
banks failed during the crisis or during the subsequent 
months and years of depression. And of the failures 
which did occur hardly any involved serious loss to cred- 
itors. '' There was, indeed, at the beginning of the crisis 
evidence of momentary loss of confidence in the banks, 
but this was primarily due to the disasters which had 
taken place in other branches of business, particularly 
among the railroads and the private bankers and brokers 

<^The Commercial and Financial Chronicle, January 10, 1874, contains a 
list of the railroads in default for nonpayment of interest on their bonds. 
bSee p. 81. 



Crises Under National Banking System 

who dealt in their securities. There is, however, one 
method of estimating roughly the measure of responsibil- 
ity which rests upon banks for the creation of crisis con- 
ditions. If the expansion of loans has been unusually 
rapid in the years just before a crisis, it must have con- 
tributed to the creation of the unhealthy situation. More- 
over, the expansion of credit liabilities, which is created 
by the increase of bank loans, may not be accompanied 
by a parallel increase in the cash reserves in the banks. 
In that case the banks may be so weakened that, though 
able to withstand the shock of a crisis, they may not be 
able to extend that aid to the business community which 
may be reasonably expected from them. These are mat- 
ters which can be analyzed statistically, and, so far as the 
national banks are concerned, the periodical returns to 
the Comptroller of the Currency, together with the weekly 
returns of the clearing-house banks in the large cities, 
provide a mass of data which is far more complete than 
that in any other country. Moreover, for the particular 
period under review the national-bank returns include a 
larger proportion of the banking operations of the coun- 
try than is the case in later crises, because of the com- 
paratively small number of state banks and trust compa- 
nies at that time. In the tables which follow compari- 
sons will be based upon the returns of the banks in June 
of each of the four years before 1873. I'he returns for 
that season of the year happen to have been made at 
almost the same date in successive years. They show the 
condition of the banks at a time when they were least 
influenced by special temporary circumstances, and when, 



National Monetary Commission 



it may be added, the ratio of reserves to demand liabili- 
ties was most satisfactory. 

In a country with a growing population there are nor- 
mally increasing requirements for banking accommoda- 
tion, and these requirements become particularly large 
during years of active business. Unless, therefore, the 
expansion of bank loans assumes large proportions, or 
unless there is direct evidence of reckless banking meth- 
ods, the creation of unsound business conditions can not 
be laid at the doors of the banks simply because of an 
increase in bank loans. In the particular case before us 
the banks can not be said to have been particularly at 
fault. The following table shows for June of each year 
from 1869 to 1873 the number, capital, surplus and undi- 
vided profits, and the loans of the banks: 

[In millions.] 



June 



1869 
1870 
1871 
1872 
1873 



National 
banks. 


Capital. 


Surplus. 


I. 619 


$422 


$126 


1,612 


427 


134 


1.723 


4SO 


144 


i,8s3 


470 


IS5 


1,968 


490 


172 



7IS 
789 
871 

926 



During the four years loans were expanded at a fairly 
uniform rate, the total increase of $240,000,000 being 
almost exactly 35 per cent. But in the meantime there 
had been an addition of $114,000,000 to the investment 
of the shareholders in the business. In the second place 
it is to be noted that there were 349 more banks in the 
national system at the close of the interval, 313 of which 
were established in the South and West, which were insuf- 



Crises Under National Banking System 

ficiently supplied with banks in 1869. For this reason the 
relatively large increase in loans in those parts of the 
country from $130,000,000 to $238,000,000 does not 
necessarily imply reckless or even unhealthfully rapid ex- 
pansion of credit. Both relatively and absolutely the 
movement of loans in the North Atlantic States was con- 
fined within moderate limits. In the case of the country 
banks of those States the increase was from $235,000,000 
to $300,000,000, while by the city banks it was from 
$321 ,000,000 to $388,000,000. Finally, it should be noted, 
that in New York, where the railroads were largely 
financed and where the failures occurred which precipi- 
tated the crisis, there was strikingly little loan increase, 
only $21,000,000 — from $174,000,000 to $195,000,000. 
The conclusion seems clear that the national banks can 
not be held very largely responsible for creating unhealthy 
conditions by an unwise policy of rapid loan expansion 
during the years immediately preceding the crisis of 1873. 

NATIONAL BANK RESERVES, 1869-1873. 

Even a moderate increase in loans may, however, 
weaken the banks if the greater liabilities thus created do 
not rest upon increasing cash reserves. During the period 
in question the operations of the banks were carried on 
under highly exceptional circumstances as regards the 
influences to which the reserves were subject, and a some- 
what lengthy digression is necessary to explain the exact 
situation. The money supply of the country was not 
susceptible to any influences which might bring about an 
appreciable change in its amount. The business of the 
country was being carried on upon a fixed amount of 

5 



National Monetary Commission 

inconvertible paper money. This currency was redun- 
dant, as was clearly indicated by the premium on gold, 
but it was at a fixed point of redundancy, aside from 
variations in requirements for the use of money. There 
were almost exactly $700,000,000 of paper money in the 
country throughout the four years, of which $356,000,000 
consisted of legal-tender United States notes, and of the 
remainder there were in 1869 nearly $300,000,000 of bank 
notes and $46,000,000 of 3 per cent certificates. These 
certificates did not circulate as money, but were available 
for bank reserves. The act of July 12, 1870, authorized 
an addition of $52,000,000 of new circulation, but pro- 
vided at the same time for the withdrawal of the certifi- 
cates. The change was made gradually, so that at no 
time did it involve any appreciable change in the available 
supply of paper money.'* 

Had the country been upon a specie basis the banks 
might have increased their reserves by securing some 
portion of current gold production. The banks and also 
the Treasury did hold considerable amounts of specie 
throughout this period, and the specie could be included 
in the reserves required by law to be held by the banks, 
but it could not be used to meet the ordinary require- 
ments of depositors. It was constantly at a premium 
of between 10 and 15 per cent. Like any other hquid 
asset of a bank, it could be disposed of, but its sale could 
not add to the money in circulation. The Pacific coast 
was an exception, but the banks of that region were few 

« The substitution of bank notes for certificates seems to have involved 
some sHght contraction, since the banks were required at that time to hold 
a reserve against their circulating notes. 



Crises Under National Banking System 

in number, and their transactions may be disregarded 
when considering the situation of the banks as a whole. 
The banks had no inducement to increase their specie 
holdings, and in the country at large outside of New 
York, they held but an insignificant portion of their 
reserves in this form, seldom more than $6,000,000." In 
New York the case was quite different. In that city was 
largely concentrated that portion of the business of the 
country which continued to be carried on upon a gold 
basis, such as the payment of import duties and foreign 
exchange dealings. There were at all times large deposits 
in the banks payable in gold, and there were regular gold 
as well as currency clearings at the clearing house. The 
gold holdings of the New York banks fluctuated widely, 
but always formed a considerable portion of their total 
reserves, varying in amount from one-third to one-half 
that of their holdings of legal-tender notes. This gold 
would have been a valuable resource had specie pay- 
ments been resumed, but in the existing conditions it 
was far less a real source of strength than would have 
been an equivalent amount of legal tenders. The specie 
held was required for the handling of the particular busi- 
ness transacted upon a gold basis, and although the 
greater part of it was in the nature of a special deposit 
earmarked and not available to meet the requirements 
of depositors generally, it was all included in the state- 
ment of the reserves. On September 12, 1873, the de- 
posits payable in gold were $12,101,000, and the banks 
held in coin $14,586,000. '' Practically the legal tenders 

oSee table in Comptroller's Report for 1873, p. XLIV. 
6 Ibid., p. XXIX. 

7 



National Monetary Commission 

were the only reserve against the remaining $189,000,000 
of deposit Habihties. In analyzing the reserves of the 
New York banks, therefore, it will be necessary to dis- 
tinguish carefully between the reserve which met the 
legal requirements and the available reserve in actual fact. 
As regards the legal-tender notes, it was impossible for 
the banks to enlarge their holdings for several reasons. 
Prices and wages were at a high level on account of the 
redundancy of the currency, and consequently the re- 
quirements for money for everyday hand-to-hand use 
were large and tended to increase with the growth of 
population and business dealings. Moreover, a given 
volume of transactions in commodities at the high level 
of prices required correspondingly large credit accom- 
modation expressed in terms of the depreciated paper. 
The uses for the curency were, therefore, enlarged both 
as to reserves and outside the banks and to an extent 
which roughly corresponded with the high level of 
prices. In these circumstances the increasing number 
and capital of the banks did not tend to provide them 
with more money for their operations. As the number 
of banks increased the reserves became more widely 
scattered, and consequently somewhat less available, 
and larger capital and surplus would serve only to offset 
a part of the increase in demand liabilities created by 
the expansion of loans. The conclusion is clear that it 
was practically impossible for the banks to strengthen 
themselves during a period of active business. On the 
other hand, during a period of inactive business it would 
be certain that a larger proportion of the money supply 



Crises Under National Banking System 



of the country would accumulate in the banks because of the 
diminished requirements for its use for everyday purposes 
outside the banks. This was the situation early in 1869, at 
the beginning of the period which we have taken for analysis. 
Finally, it should be remembered that no distinction 
was made between deposit and note liability in the national 
banking law until 1874. Banks were required to hold 
the same kind of reserve for both kinds of liabilities, but 
even during the worst moments of the crisis of 1873 the 
liability for notes was not one which caused any deple- 
tion of reserves. For this reason, and because it sim- 
plifies comparison with the condition of the banks before 
later crises, the relation between reserves and deposit 
liabilities will be specially emphasized in analyzing the 
situation of banks. In the following table, however, the 
liabilities of the banks for both notes and deposits are 
presented, together with their specie and legal-tender 
reserves, from June, 1869, to June, 1873: 

[In millions.] 



June 



Circula- 
tion. 


Deposits. 


Specie. 


$292 


$528 


$18 


291 


575 


31 


315 


638 


20 


333 


6s6 


24 


338 


678 


28 



Legals. 



1869 

1870 
1871 
1872 
1873 



S?i3i 
138 
152 
13s 
129 



From this table it will be seen that in 1869 the banks 
were exceedingly strong in cash reserves, holding nearly 
28 per cent in proportion to their deposits. Notwith- 
standing the considerable increase in deposit liabilities 
and the slight reduction in cash holdings, the proportion 



National M o n et ar y Commission 

of reserve was reduced to only 23 per cent in 1873. Even 
if the liability for notes is included, the banks held 18 
per cent in 1869 and 16K per cent in 1873, proportions 
which, compared with the cash held in recent years by the 
banks against deposits alone, were exceptionally large. 
The percentage of reserve in June, 1 873, was almost exactly 
that of the banks in July, 1908, when, on account of gener- 
ally inactive business, the banks held far larger reserves 
than is now customary. It would seem, therefore, that the 
cash foundation of the credit structure had not been 
seriously weakened. But the amount of cash required to 
insure the smooth working of the banking machinery of 
a country can not be determined by purely arithmetical 
calculations. Much depends upon the requirements which 
are likely to be made for money, and also upon the amount 
of cash which bankers have been accustomed to regard as 
a minimum, in order to avoid reducing which they would 
resort to drastic loan contraction and even to suspension. 

In this connection the increase in the number of banks — 
from 1,619 ill 1869 to 1,968 in 1873 — i^i^-y be mentioned 
as a factor which tended to weaken somewhat the effec- 
tiveness of the aggregate reserve. Each separate unit of 
reserve was, on the average, somewhat smaller, and was, 
therefore, less effective both for use and as a basis for 
public confidence. Moreover, with the greater number 
of banks, the difficulty was enhanced of securing that 
cooperation which is required if the credit machinery is 
to work smoothly in emergencies. 

We must now enter upon a more detailed analysis of 
the reserves of the banks, including not only the cash 
held, but also the deposits with reserve agents, which 



Crises Under National Banking System 



make up so large a part of the reserves of most of the 
banks in the national system. The country banks then, 
as now, were required to hold in their own vaults cash 
equal to at least 6 per cent of their deposit liabilities, 
and also, until 1874, 6 per cent of their liabilities in the 
form of bank notes. The remaining 9 per cent might be 
held by approved agents in the "redemption cities," as 
they were then called, a term which indicates the original 
purpose of the arrangement — to provide facilities for the 
regular redemption of circulation at the money centers. 
The following table shows the situation of the country banks 
in June of each year from 1869 to 1873: 

[In millions.] 





1869. 


1870 


1871 


1872 


1873. 




$209 
186 


$217 
189 


$231 
212 


$260 
230 






232 




Total _. . 


39S 


406 


443 


490 


524 






82 
39 
43 


92 
43 
49 


lOI 

42 

59 


102 
45 

57 


108 


Cash._- - _. ... 


47 
61 










20.8 
39- 2 


22.6 
42. 4 


22.8 
43-8 


20.6 
39- 2 


27 
37 


Ratio to deposits , 



The reserves of the country banks were well above the 
requirements of the law. They held at all times in cash 
alone more than 15 per cent of their deposit liabilities, 
the ratio falling from 19 per cent in 1869 to 16 per cent 
in 1873. If deposits with agents are included, the coun- 
try banks held a reserve- of much more than one-third of 
their deposit liabilities, even at the close of the period. 
The country banks, therefore, would clearly seem to have; 
been well supplied with funds to meet emergencies. It^ 
should, however, be noted that, although cash holdings 
6158 — 10 2 II 



National Monetary Commission 



had been increased by $8,000,000, deposits with reserve 
agents had increased $18,000,000. This indicated a 
greater power to withdraw money from the city banks 
and also a shghtly greater probability that it would be ex- 
ercised in case of unusual demands upon the country banks. 
There were at this time, as at present, two classes of 
reserve or redemption cities. Fifteen cities were desig- 
nated in the national banking law the banks of which 
might become the agents of country banks. The banks 
of these cities were required to hold a reserve of 25 per 
cent, one-half of which might be deposited in the banks 
of New York, which until 1887 was the only city of central 
reserve rank. Taking first the banks of the fifteen reserve 
cities, the following table shows their condition during 
the four years before the crisis of 1873: 

[In millions.] 





1869. 


1870- 


1871. 


1872. 


1873. 




$151 
71 


$168 
69 


$189 
72 


$199 
75 


S200 




78 






Total 


222 


237 


261 


274 


278 








64 
45 
19 


75 
50 

25 


82 
49 
33 


79 
46 
33 


79 . 


Cash -- --- 


46 




33 








28.9 
42.6 


31.8 
44-6 


31-6 

43-4 


28.9 
39-6 


28.2 




39-5 







The banks of the reserve cities, like the country banks, 
held a reserve considerably above legal requirements 
throughout this period. Taking liabilities for deposits 
alone, the proportion of cash fell off somewhat from 29 
per cent to 23 per cent, while the deposits with agents, 
which increased rapidly until 1871, were thereafter prac- 



Crises Under National Banking System 

tically stationary at $33,000,000. All of this amount 
was, of course, held by the banks of New York, the banks 
of which also held the deposited reserves of many of the 
country banks. The position of the New York banks 
was even more important as reserve agents than it has 
been in recent years. They held in bankers' balances 
quite 60 per cent more than the amount held by all the 
banks of the reserve cities. Although the country banks 
and those in reserve cities were well supplied with cash, 
many of the former and all of the latter possessed the 
right to withdraw large sums from New York, and, there- 
fore, the condition of the New York banks is the most 
important single factor to be considered in estimating the 
strength of the system as a whole. For this reason it is 
advisable to make a somewhat detailed examination of the 
operations of the New York banks, and the following table 
therefore includes a number of items which were not in- 
cluded in the tables which had reference to the other banks : 

Abstract of the returns of the New York national banks, 1869-1873. 
[In millions.] 





1869 


1870 


1871 


1872 


1873. 


Net deposits 


$168 
35 


$190 
i3 


$217 
31 


$197 
28 


$186 
27 




Total 


203 


223 


248 


22s 


214 






Reserve held . 


61 

14 
47 
43 
14 


72 
18 
54 
53 
16 


76 
II 
65 
66 
20 


65 
15 
50 
63 
18 


64 






Legal -tender notes 
















Ratio to demand liabilities 

Ratio of legal-tender notes to deposits 
less specie held by the banks 


30. 7 
30.5 


324 
31- 4 


30.9 
31-5 


29. I 
273 


39 
25.2 



13 



National Monetary Commission 

In certain respects it will be noticed that the showing 
of the New York banks was quite as satisfactory as that 
of the other banks of the country. Demand liabilities 
had increased only moderately, and since 1871 had actually 
declined. The percentage of reserve to demand liabil- 
ities throughout the period was well above legal require- 
ments. But the composition of the reserve was somewhat 
less satisfactory, showing a distinct decline in the pro- 
portion of legal tenders. The specie holdings of the 
banks, it will be remembered, were not at that time 
available for ordinary purposes, and were largely held 
to secure special deposits. The most significant indi- 
cation of the strength of the banks, therefore, is gained 
by taking the proportion of legal-tender notes to the 
deposit liabilities less the amount of specie holdings. 
Measured in this way it will be seen that there was a 
serious change for the worse in the condition of the banks. 
Against a deposit liability of $206,000,000 in 1871 the 
banks held $65,000,000 in legal-tender notes, while in 
1873 they held but $41,000,000 against $163,000,000 of 
deposit liabilities. One further test, and a most import- 
ant one, of the condition of the banks is still to be made. 
Bankers' deposits show a rapid increase between 1869 
and 1 87 1 from $57,000,000 to $86,000,000. From that 
point there was a moderate decline to $81,000,000 in 
1872, and to $76,000,000 in 1873, but in 1871 the banks 
held $65,000,000 in legal- tender notes, while in 1873 
they held but $41,000,000. The other banks of the 
country had largely increased their credits with New York 
banks, which at the same time were much less well sup- 



14 



Crises Under National Banking- System 

plied with means to meet the heavy responsibility thus 
created. The efficient working of the credit system was h 
evidently more and more dependent upon the ability of 
the New York banks to meet all the demands of their / 
banking depositors, and this ability was diminishing. 

THE CONCENTRATION OF BANKERS' DEPOSITS. 

It is necessary to carry one step further this analysis 
of the reserves of the national banks. Responsibility 
for bankers' deposits did not rest upon the New York 
banks as a whole. There were during this period some 
50 national banks in the city, but the majority of them 
were not reserve agents, and their statements show only 
such small amounts due to banks as would naturally 
arise in the course of the ordinary business of any bank. 
The business of such banks was of a purely local character, 
having no more general significance than that of banks 
with an equal volume of business in Maine or Kentucky.'* 

During the period before the crisis of 1873 some 15 
of the 50 New York banks held practically all of the 
bankers' deposits acquired by the banks of the city, 
and 7 of them held between 70 and 80 per cent of these 
deposits. ^ These 7 banks were directly responsible for 
the satisfactory working of the credit machinery of the 
country, and their condition prior to the crisis must be 
carefully examined. 

«The statement in the text may be qualified by the further observation 
that the failure of a purely local New York bank might cause loss of confi- 
dence in the New York banks generally, including those which were of 
national importance. 

^The 7 banks were the First, Third, Fourth, Ninth, Central, Importers 
and Traders', and Park National banks. 

15 



National M on et ar y Commission 

It has been too exclusively the practice to analyze the 
condition of the banks as a whole or by localities, a 
method which tends to obscure any real imderstanding 
of the working of our system. It is of the utmost im- 
portance to locate the particular point at which the strain 
of a crisis will be most directly and severely felt, and to 
form an exact notion of the provision to meet it when it 
does come. The returns of the condition of the individual 
banks have been included in the annual reports of the 
Comptroller of the Currency for only one date in each 
year — the return for the early autumn. For a purely 
local bank such information is ample, but it is much to 
be desired that more complete information were provided 
for those of the banks which are reserve agents. Such 
data would be of value in following the changes which 
take place in the banking situation as a whole, and would 
also concentrate the attention of the public upon the 
peculiar responsibilities of banks which hold bankers' 
deposits. In the case of the New York banks further 
information, though of a less comprehensive nature, is to 
be had from the weekly clearing-house statements; but 
as these statements for the individual banks were dis- 
continued during the crisis of 1873 it is necessary to 
take some other year in order to analyze the exact effects 
of demands upon New York from the outside banks. 
For this purpose the year 1872 has been selected. In 
any case attention should be given to that year, since it 
enables us to form an opinion of the power of the credit 
structure to withstand financial strain of moderate 
severity. Obviously, if moderate strain which can be 



16 



Crises Unde?^ National Banking" System 

foreseen can not be met easily, a banking system is in 
no position to meet the severe strain of a crisis. 

The following table shows the condition on October 3, 
1872, of the New York banks as a whole, that of the 7 
banks which held the bulk of the bankers' deposits, and 
the condition of the other 43 banks: 

[In millions.] 



Capital 

Surplus and net profits 

Circulation 

Individual deposits 

Due national banks 

Due other banks 

Total liabilities 

Loans - 

Bonds 

Due from other banks 

Clearing-house exchanges and cash items 

B ills of other national banks 

Specie 

Legal- tender notes 



so banks. 



183 

44 
16 
93 
2 
6 
39 



7 banks. 43 banks. 



$14 

S 

7 

34 

44 

6 



i?s6 
26 
20 

154 
IS 



125 

34 

9 

. 75 

2 

5 
23 



The situation disclosed by a survey of this table was 
certainly extraordinary. Of the total bankers' deposits 
of $75,400,000 the seven banks held $51,700,000, 72 per 
cent; and if the more proper basis of net bankers' deposits « 
is taken, they held $45,000,000 out of a total of $58,900,000, /. 
or nearly 76 per cent. But the accumulation of bankers' 
deposits in a few banks is by no means the most striking 
feature of the table. The capital and surplus of the seven 
banks made up only 20 per cent that of all of the 
banks, and their individual deposits were but 18 per cent 
of total deposits. The bankers' deposits of the seven 



17 



National M o n e t ar y Commission 

banks were $11,000,000 greater than their individual de- 
posits ; and if clearing-house exchanges are deducted from 
their individual deposits, liabilities to bankers were some 
three times those to individuals. On the other side of 
the account it will be noticed that against net deposits 
(gross deposits less clearing-house exchanges, bills of 
and amounts due from other banks) of $60,600,000 
and a note issue of $7,400,000 the seven banks with 
their reserve of $16,600,000 v/ere six-tenths of i per 
cent below the 25 per cent legal requirement, while the 
other banks, with net deposits of $91,100,000 and circula- 
tion of $20,600,000, held a reserve of 25.8 per cent. It is 
obvious that the seven banks were in no position to meet 
considerable demands from their depositors without a 
drastic contraction of their loans. Furthermore, the total 
of their loans, $58,000,000, was exceedingly small when 
one considers the nature of their deposit liability. A 
demand for money spread pretty evenly among the banks, 
and leading to a given amount of loan contraction, would 
cause far less disturbance than the same amount of con- 
traction confined to the restricted circle of the borrowers 
of the seven banks. The conclusion seems clear that these 
banks and the particular borrowers served by them were car- 
rying on their operations almost wholly upon the unstable 
basis provided by the deposits of the out-of-town banks. 
It is clear, then, that with this situation in New York 
an emergency would cause serious disturbance if it should 
lead to the withdrawal of any considerable amount of 
money by the outside banks, and there could not be the 
slightest doubt that this would be done or at least 
attempted. Every year furnished ample evidence that 

18 



Crises Under National Banking System 



the outside banks had a strong preference for reducing 
their balances with agents rather than their own cash 
reserves whenever their depositors resorted to them for 
even very moderate supphes of money. The result is dis- 
closed in the following table, which shows the cash re- 
serves and the deposits with agents of the country national 
banks at the time of each of the five returns to the Comp- 
troller of the Currency in 1871 and in 1872: 

[In millions.] 





Cash. 


Deposits 

with 
agents, 




Cash. 


Deposits 

with 
agents. 


I87I. 

Mar. 18 --- 


$45 
43 
42 
43 
42 


$SS 
55 
59 
55 
49 


1872. 
Feb. 27 


$44 
46 
44 
45 
46 


$58 












Oct. 2 


Oct. 3 

Dec. 27 


52 


Dec. 16 









From this table it will be seen that the cash reserves 
of the country banks remained almost stationary, even 
showing a slight tendency to increase at those times of 
the year when the demand was large from depositors. 
Such demands were met entirely by withdrawals of money 
from reserve city agents. With this table comparison 
should be made with the table which follows, showing the 
fluctuations in the net amount owed by the New York 
banks to other national banks at the same dates. 

[In millions.] 



March 

April 

June 

October 

December. 



$64. 





6: 


6 


66 


2 


61 


4 


SI 


S 



1872. 



February . 

April 

June 

October. _ 
December. 



SOI. 4 

64. 7 
62. 9 
47- 6 
SO. 6 



19 



National Monetary Commission 

From this table it will be seen that bankers' deposits 
were regularly large at the beginning of each year. The 
early spring months witnessed a moderate decline which 
was more than regained in the early summer, to be as 
regularly followed by a more considerable decline in the 
autumn. Then, as now, the cause which made possible 
this alternate movement of funds was the seasonal differ- 
ences in requirements for money for use outside the banks. 
Since there was a fixed amount of currency in the coun- 
try, the amount of money in the possession of the banks 
varied with the seasons, but this circumstance did not 
necessarily involve the accumulation of bankers' deposits 
for short periods in New York. The money might have 
remained diffused among the banks throughout the coun- 
try. That it did not do so was primarily owing to the 
interest which could be secured upon such deposits from 
some of the city banks. 

The practice of paying interest upon deposits and in 

? particular upon bankers' deposits was contrary to the 
best banking opinion of the time, and was adopted by 

i only twelve of the sixty banks in the New York Clearing 
House. Unavailing efforts, especially after the crisis of 
1857, had been made to secure a unanimous agreement 
among the banks to discontinue the practice.'* It follows, 
therefore, that the seven banks, all of which paid interest 
upon deposits and which had secured the bulk of the 

' bankers' deposits, were directly responsible for any dis- 
turbance in the New York money market, which was due 



o For the strong case against the practice presented by a special clearing- 
house committee, see Bankers' Magazine, April, 1858, pp. 822-831. 



Crises Under National Banking System 

to the use of these funds, and also for any failure to meet 
demands for their return to banks in the rest of the 
country. 

The payment of interest upon deposits had two unde- 
sirable consequences. Its most obvious result was to cause 
money to be sent to New York in larger quantities than 
would otherwise have been the case, though how much 
more was sent on this account can not be determined. 
Had no interest been offered by the New York banks, the 
outside banks would doubtless have lent more largely 
directly to borrowers in New York when the demand for 
loans was slight at home, but it is not reasonable to think 
that money thus invested would have by any means 
equalled balances deposited in New York in excess of 
legal reserve requirements. But the chief evil of interest 
upon bankers' deposits was of a different character. The 
interest-paying banks were unable to maintain large 
reserves and at the same time realize a profit from the 
use of the funds thus attracted. Particularly was this 
the case when the accumulation of such funds was only 
temporary. The extra supply of money to be lent forced 
down rates, and, as rates fell, more and more had to be 
lent by the banks in order even to equal the interest which 
they had contracted to pay. In the years before 1873 
the banks paid as much as 4 per cent for bankers' deposits, 
a rate which, relative to lending rates at that time, is not 
far from the 2 per cent rate of a later period. If the 
banks receiving these deposits had followed the practice 
of European central banks and had paid no interest, they 
could have kept a large reserve and still have earned a 



National Monetary Commission 



satisfactory profit. But, unfortunately, this was not the 
pohcy which was adopted, although the mere fact that a 
number of banks in New York and not a single bank, as 
in European countries, secured these bankers' deposits, 
did not change the nature of the obligation or responsi- 
bility. New York bank loans regularly expanded with 
every increase in the receipt of deposits from out of town 
banks. Year after year the loans of the banks followed 
the same course, advancing in the early months of the 
year and undergoing some decline in the spring, then 
rising to the highest level of the year in July, only to be 
followed by contraction which as regularly brought loans 
to their lowest level in October. The following table 
shows the movement of loans, deposits, and cash of the 
New York clearing-house banks at selected dates in 1872: 



[In millions.] 



Loans. 


Deposits, 


Specie 


$270 


$200 


$2$ 


282 


210 


18 


273 


195 


18 


284 


226 


21 


288 


228 


20 


297 


247 


29 


299 


237 


18 


29s 


23s 


20 


288 


219 


16 


280 


201 


12 


272 


I9S 


II 


269 


186 


10 


268 


• 189 


12 



Legals. 



Jan. I . . 
Mar. 4. 
Apr. 22. 
June 3 _ 
June 17 
July 22. 
Aug. 12 
Aug. 19 
Sept. 2. 
Sept. 23 
Sept. 30 
Oct. 7 . - 
Oct. 14- 



53 
55 
S3 
54 
S2 
49 
44 
45 
42 
45 



Since the movement of loans and of reserves was in 
close correspondence with known movements of bankers' 
deposits it is therefore to be expected that changes in 



Crises Under National Banking System 



the operations of the seven banks will account for the 
bulk of these fluctuations. As an illustration the follow- 
ing table is presented showing the loans of the New York 
banks, those of the seven banks, and those of the remain- 
ing banks on July 29 and October 7, 1872: 







[In millions.] 










60 banks. 


7 banks 


S3 banks. 




1872. 




$295 
269 


$90 
71 


$205 
198 


Oct. 7-- - -- 







It will be observed that the loan contraction of the 
seven banks makes up $19,000,000 out of a total of 
$26,000,000. The seven banks reduced their loans by 21 
per cent, a proportion which would be still greater if the 
security holdings of the banks were not included with 
loans in the weekly New York bank statement. The 
bond holdings of the seven banks were set down in the 
comptroller's return for October 3, 1872, at $10,000,000, 
and, as a large portion of them were held for circulation, 
it is reasonable to assume that the amount had not 
greatly changed during the short interval covered in the 
table. Upon this assumption, the loans of the seven 
banks were $80,000,000 in July and $61,000,000 in 
October, showing a contraction of 24 per cent. In the 
case of the other banks the contraction was less than 3^ 
per cent, and, omitting bonds, it was only slightly more 
than 4 per cent. Evidently the banks holding bankers' 
deposits lent to an excessive extent upon the basis of the 
resources thus secured, even though it was perfectly 



23 



National Monetary Commission 

apparent that they were available but for a very short 
time. It should also be noted that neither the industrial 
nor commercial business which centered in New York was 
of a nature to require temporarily large accommodation 
at the particular time when the bankers' deposits were 
large. The loans which were made, therefore, were 
largely in connection with stock-exchange dealings. The 
interest-paying banks were all known as Wall street 
institutions. They favored stock-exchange loans, espe- 
cially call loans, because they were regarded as peculiarly 
liquid, and also, it may be suspected, because there is an 
almost indefinite hunger for loans in that quarter. This 
practice agreed with the view still commonly held, that 
call loans are the only proper basis for the use of funds 
subject to unexpected withdrawal. How far in emergen- 
cies this view is sound will be examined in our analysis of 
successive crises. Here it may be noted that even the 
seasonal requirements of normal years could not be met 
without severe strain and high rates for loans. In July 
and August speculation in securities flourished upon the 
basis of cheap money. Prices advanced to levels which 
could not be maintained, only to fall in September and 
October to equally temporary low levels. Even though 
the banks were able to liquidate their loans to some extent, 
this system created opportunities for speculative manipu- 
lation which were a source of loss to many and which cast 
not a little discredit upon American financial methods. 

THE NEW YORK MONEY MARKET IN 1872-73. 

At this point it will be of advantage to follow the course 
of the New York money market during the summer and 

24 



Crises Under National Banking System 

autumn of 1872. There was a slow but continuous in- 
crease in loans from $273,000,000 in April to $299,000,000 
on August 12. Continued ease prevailed, and shortly 
after the middle of the month it was reported that "the 
money market for August has been unusually quiet, with 
an ample supply of money on call and seeking invest- 
ments in commercial paper and in railroad securities. 
The rates for loans on call have been as low as 4 per cent, 
and freely offered at 5 or 6 per cent. ' ' " 

The withdrawal of money for crop-moving purposes 
then began, accompanied by the usual contraction of 
loans. In the course of the six weeks to September 22 
the banks lost $10,000,000 in legal-tender notes, and loans 
were reduced by $18,500,000. Writing on this date, it 
was reported in the monthly financial review in the 
Bankers' Magazine that "the quiet of summer in the 
money market has been succeeded by a period of increas- 
ing activity, culminating in great excitement during the 
past week. The usual demand from the West for cur- 
rency to move the autumnal crops had already reduced 
the deposits and the reserve of our city banks by several 
millions, when an unscrupulous combination of designing 
stock operators seized the opportunity to further their own 
ends by the endeavor to bring about a panic, in which they 
very nearly succeeded. This trickery was attempted at the 
same period of last year and produced then similar results. 

"The bank returns show a line of deposits some $36,- 
000,000 less than at this time in 1871, with a reduction of 
$14,000,000 of currency and legal tenders, while the crops 

o Bankers' Magazine, September, 1872, p. 236. 

25 



National M o n et ar y Commission 

of the interior are larger this year than last. The weekly 
statement exhibits a deficiency in the legal reserve of 
$332,475 below the required 25 per cent. In the corre- 
sponding week of last year the banks held an excess of 
$1,168,250. 

"Rates for money have increased very considerably, 
as high as one-half per cent having in some cases been 
paid for the temporary wants of needy borrowers in 
carrying stocks. On the best classes of loans 6 to 7 per 
cent per annum is paid." ^ 

The following week witnessed a further contraction of 
$8,000,000 in loans. The pressure to sell on the stock 
exchange became general, and complete demoralization of 
the money market was threatened. At this point the 
Government came to»the relief of the banks by the sale of 
gold and the purchase of bonds to the amount of $5,000,000 
of each. This assistance was sufficient to enable the banks 
to meet further demands upon them without very much 
further loss in their reserves, since the crop-moving re- 
quirements were nearly at an end. Referring once more 
to the monthly report in the Bankers' Magazine, we find 
that "the extreme stringency which existed at this time 
of last month has given place to a condition of the money 
market which is comparatively one of ease. It has been 
brought about by the sale of gold and purchase of govern- 
ment bonds by the Secretary of the Treasury to the ex- 
tent of $5,000,000 of each — an action which, though afford- 
ing a timely and welcome relief to banks and business 
men, is a measure of doubtful expediency and likely to be 

o Ibid., October, 1872, p. 316. 
26 



Crises Under National Banking System 

but temporary in its good effects. Under a proper sense 
of duty on the part of our city banks no such adventitious 
aid should have been needed. They should have been 
prepared for the inevitable autumnal reduction of balances 
belonging to their western correspondents by holding 
much larger reserves. But the pernicious practice of 
allowing interest on current deposits impels their employ- 
ment in the kindred evil of call loans; and these made to 
stock speculators, too often reckless and unprincipled, 
subject our money market to violent disturbances, de- 
prive the business community of accommodations justly 
their due, increase largely the lists of failures, and foster 
that growing mania for gambling which is one of the 
worst features of the day." "^ 

This disturbance and strain in the money market was 
clearly caused by the close use by the banks of the funds 
which they received from outside institutions. But as 
further evidence the following table is instructive: 

[In millions.] 





Country banks. 


Reserve city banks. 


New York banks. 




Cash. 


Deposits 

with 
agents. 


Cash. 


Deposits 

with 
agents. 


Cash. 


Due to 
banks. 


1872. 


$44 
46 


$5 7 

52 


$45 
38 


28 


$65 
45 


$78 


Oct. 3 


56 







The course of events in 1872 indicated clearly that the 
country banks would rely entirely upon their balances 
with city banks and might even strengthen their cash 

o Ibid., November, 1872, p. 396. 



6158—10 3 



27 



National M on et ar y Commission 

reser/es in an emergency. The banks in the reserve cities 
paid out $7,000,000 from their own reserves, but shifted 
a considerable part of the burden to New York by reduc- 
ing their deposits at that center by $5,000,000. The New 
York banks paid out $20,000,000, a loss almost equaling 
the reduction in the amount due to other banks. Upon 
them rested the burden of finding very nearly all the cash 
required for crop-moving purposes, and there was every 
probability that in an emergency the other banks would 
resort even more exclusively to the withdrawal of their 
funds deposited in New York. 

Although the stringency was considerably relieved in 
October, it did not entirely disappear until after the 
beginning of the following year, being prolonged beyond 
the usual term. But though at length the return flow of 
money from the interior became normal in volume, the 
proportion of bank notes to legal tenders was unusually 
large. An opportunity was thus afforded for the exercise 
of a wise policy of conservatism by the banks. Most of 
the money coming to the city from the interior was sent to 
the seven banks, which were at the same time the redemp- 
tion agents of their banking depositors. It would have 
been a simple matter for the depository banks to have 
required at least the redemption of the notes of those 
banks for which they were the redemption agents. It 
would have involved no direct payments of cash but 
simply a cancellation of the deposits of their correspond- 
ents to an amount equivalent to the notes retired. But 
this policy would, of course, have diminished the available 
funds of the depository banks. The action taken in dis- 



28 



Crises Under National Banking System 

posing of the accumulation of bank notes was of an 
entirely different nature. In the Commercial and Finan- 
cial Chronicle of January i8, 1873, it was reported that 
"some of the city banks have been selling national bank 
notes for greenbacks to the brokers at one-fourth per 
cent discount, and these brokers sell them again at 
one-eighth per cent to supply country banks." In his 
annual report for 1872 the Secretary of the Treasury had 
observed that the "redemption of the national currency is 
too formidable and expensive to be adopted by any bank 
or association of banks." It would, however, seem that 
the New York banks might have been reasonably expected 
to resort to occasional redemption rather than to the sale 
of surplus notes at a discount. This episode affords 
striking confirmation of the opinion of a banking authority 
that where thousands of banks issue notes no effective 
redemption can be secured unless each bank is forbidden 
to pay out the notes of other banks.'' 

The customary midwinter ease in the money market 
was cut short at an unusually early date in 1873. The 
withdrawal of funds by interior banks was large and so 
also was the resulting contraction of loans in New York 
City. During March and April loans were reduced by 
$21,000,000, and then stood very nearly at the level at 
which they had been in the previous October. Both the 
unsatisfactory situation and remedies therefor were 
clearly set forth in the Bankers' Magazine for May and 
June, 1873, from which the following extracts are taken: 

The month has been remarkably stringent in its money features, pro- 
ducing heavy losses to borrowers, and resulting in the failures of several 

o C. F. Dunbar, Theory and History of Banking, p. 73. 
29 



National Monetary Commission 

firms heretofore possessing large capital and good credit. Among these 
suspensions are Messrs. Barton & Allen, on the i6th instant; Brownell & 
Bro. on the 17th, and Lockwood & Co. on the i8th. The rates prevailing 
for money in April have been quite as severe in Wall street as at any pre- 
vious period. The enlarged volume of stocks and bonds on the market, 
rapidly increasing during the last two years, has demanded fresh capital to 
sustain prices and the market. This capital has been liberally supplied 
from foreign and domestic sources, thereby creating higher prices. At the 
same time the stock exchange and its members have absorbed a large 
portion of the capital which is demanded for the legitimate wants of trade 
and commerce. The country bankers, far and near, have been impor- 
tuned to place their cash balances in Wall street, instead of keeping them 
at home, the promise of high rates of interest creating inducements for the 
transfer of capital to New York. Country bankers in former days kept from 
$10,000 to $100,000 on hand in their vaults to meet the ordinary cash 
demands of the day. Gradually, this "ready cash," instead of being kept 
dead in their vaults, has been largely transferred to New York, where 4, 5, 
or 6 per cent interest paid to the owners, would make these funds " active" 
instead of " dead." The principle is a vicious one, because the same money 
serves a double purpose, but at great risk. The exchange transactions 
with New York are so heavy and so constant, that balances in Wall street 
are by the country banker considered as cash in hand. The result has 
been that these immense accumulations of capital owned in the South and 
West, instead of being "cash on hand," are loaned out "on call" by the 
city banker, thereby contributing to a fatal inflation of prices. The coun- 
try banks thereby contribute indirectly to the stock gambling in New 
York in order to realize interest on their daily balances here. * * * 
The obvious necessity prevailing to place these accumulated country funds 
in "loans on call" (loans on stock), instead of commercial paper, so as to 
be ready at a moment's warning, for the country drafts, acts doubly. It 
encourages stock gambling and carries prices above real values, at the 
same time the legitimate demands of trade are denied, and the merchant 
and manufacturer suffer because they can not compete with the stock 
operator in the rates for money. The merchant can afford to pay 6 per 
cent, rarely more, per annum. The stock operator who bids for a rise in 
market values, offers 6 per cent per month in many instances. Even this 
is not a maximum in Wall street. In the month of April current, millions 
have been loaned at one-eighth to one-half per cent per day for carrying 
loans, and money was scarce (or not attainable) at that. One of the firms 
recently suspended announced that they had paid, between March i and 
April 16, $50,000 in extra interest. 

Is it surprising, with such prospects for money, that capital concentrates 
here from the wilds of Maine, the recesses of Connecticut, the prairies of 
the West, or the tobacco fields of the South to be used at i or 2 per cent 
per month, instead of 6 per cent at home? 



30 



Crises Under National Banking System 

Is it surprising that the bubble will burst occasionally and drive into 
common ruin the speculators for a rise in stocks or for a corner in some 
great staple of commerce? 

We caution our country bankers to keep a healthy reserve at home, and 
not to trust too large a fund in Wall street "on call."'* 

The month of April was among the most stringent in its money features, 
and has been followed by more moderate rates for money in Wall street. 
The terms to borrowers remain severe to those who are compelled to resort 
to brokers. The banks have apparently increased their loans to the 
extent of nine millions since the close of April, but are yet several millions 
below the loan column of January and February. There were some indi- 
cations, at the first of the month, of a panic in New York, brought on by 
the failure of one of the national banks and by rumors of weakness in 
others. There have been several heavy mercantile failures during the 
month, showing recklessness in credits and overtrading on limited capitals. 

The banking movement at New York indicates expansion, prompted 
by the pressing demand for money from merchants and brokers. Now, 
that the pressure is over, it would be well for the banks to curtail their 
loan column at the rate of $1,000,000 per week for three months, in order 
to strengthen their legal tenders, which are now $20,000,000 too low, or 
$43,000,000 instead of $63,000,000.^ 

That caution and even a reversal of the customary 
policy of the banks was to be desired was clearly per- 
ceived. In the Chronicle for June 7, 1873, it was ob- 
served that the "summer torpor has fairly taken posses- 
sion of Wall street, and some of the banks are yielding 
to the temptation to make time loans running into October 
and November and even longer. The leading institu- 
tions have made such large profits during the past half 
year that they ought to be content to adopt a conservative 
policy, even if they thereby sacrifice some future gain, 
and one of the evident requirements of a conservative, safe 
policy is the strengthening of reserves. Our bank officers 
will do well to look over some of their old reports and 
observe how much more ample a few years ago were the 

o Bankers' Magazine, May, 1873, p. 916. 
& Ibid., June, 1873, p. 996. 

31 



National Monetary Commission 

reserves which they used to keep than those of rtiore 
recent times." 

The usual return of money from the interior set in at 
the end of April and again the banks were afforded an 
opportunity to exhibit caution, but little heed was paid 
to the warnings of recent experience. Legal-tender 
holdings increased until on August 4 they stood at 
$50,000,000, contrasted with $55,000,000 at the same 
time in the previous year. Specie holdings were, how- 
ever, larger than in 1872, so that the total reserves of 
the banks were nearly the same in the two years. As to 
loans, no appreciable change in the policy of the banks is to 
be observed, and on August 4 they stood at $290,000,000, 
an increase of $21,000,000 from the low point in April. 
Deposit liabilities were then $3,000,000 less than in the 
previous year, but when account is taken of the larger 
amount of gold in the total reserves of the banks, it will 
be seen that they were by no means in a stronger posi- 
tion. Had nothing unusual happened there would un- 
questionably have been a repetition of the high rates and 
general financial disturbance which had characterized the 
autumn of 1872. 

During the winter and spring of 1873 fears had been 
frequently expressed that a crisis was imminent, but 
from the end of June there seems to have been a general 
feeling that the situation was improving. The excess 
of imports over exports was considerably less than at the 
same time in the previous year. Gold exports were 
upon a reduced scale, and, though more discrimination 
was being exercised, the sale of American railway bonds 



32 



Crises Under National Banking System 

in Europe had improved. The corn and wheat crops 
of the year were abundant, and a large European demand 
was assured. Grain began to move in volume at an 
unusually early date — by the beginning of September — 
and though the consequent withdrawals of money from 
New York in the first two weeks of the month were un- 
usually large, it was believed that this was a favorable 
influence, as it would probably mean that the crop move- 
ment would be spread over a longer interval than in the 
previous year. 

It seems to be invariably the case that the outbreak of 
a crisis comes as a surprise to the business community, 
and the crisis of 1873 was no exception to this rule, but 
the astonishing suddenness of the explosion, which came 
in the third week of September, can not be urged as a 
sufficient excuse for the inability of the banks to cope 
with its banking consequences. They had had ample 
experience that the reserves which they were accustomed 
to hold were insufficient to meet even ordinary require- 
ments, yet there was only too much truth in the caustic 
observation in the monthly review in the Bankers' 
Magazine for July "that the ordinary course of events 
will doubtless prevail; full sail will be carried as if sum- 
mer were to last forever ; when the now plethoric accounts 
are diminished by their owners, sharp and sudden calls 
will derange not merely stock speculation, but legitimate 
business throughout the country." °' 

More than a month before the outbreak of the crisis the 
first shipments of currency to the interior for crop-moving 

a Bankers' Magazine, August, 1873, p. 156. 
33 



National M on et ar y Commission 

purposes began, and, as in other years, they were the 
signal for loan contraction. The following table shows 
the condition of the clearing-house banks as a whole, 
the 53 banks, and the 7 banks, for August 16 and Sep- 
tember 13, 1873: 

[In millions.] 



Loans 

Specie 

Legal tenders . _ 

Circulation 

Deposits 

Surplus reserve. 



The 60 clearing-house 
banks. 


S3 banks. 


7 banks. 


Aug. 16. 


Sept. 13. 


Aug. 16. 


Sept. 13. 


Aug. 16. 


Sept. 13. 


$292.6 

27. 6 

47.6 

27.2 

234-9 

9-7 


$284.5 

20. 4 

36.7 

27.4 

207.3 

-1.6 


$206. 4 

21. I 

28. I 

19.8 

146.9 

7-S 


$202. 4 

IS- 2 

23.8 

20. 

131- 2 

I. 2 


$86. 2 
6.5 

I9-S 
7-4 

88. 
2. 2 


$82. 

5- 

12. 

7- 

76. 

— 2. 



A reduction in loans of $8,000,000 was distributed 
equally between the two groups of banks, but relative to 
their total loans it was more than twice as great in the case 
of the 7 banks. The loss in specie was said to have been 
due to payments to the Government in connection with 
the Geneva Award, and the contribution of the seven 
banks did not exceed their proportion of the total specie 
holdings of the banks. On August 16, before the crop- 
moving period began, it will be noted that the surplus 
reserve of the 7 banks was somewhat less in proportion to 
their liabilities than was the case with the other banks. 
On September 13 the banks as a whole were below the 25 
per cent requirement, showing a deficiency of $1,600,000, 
but the 53 banks still had a surplus of $1,200,000, while 
the deficiency of the 7 banks was $2,800,000. From the 
returns to the Comptroller of the Currency, which happen 



34 



Crises Under National Banking System 

to have been made on September 12, we find that the 7 
banks held net bankers' deposits of $53,500,000, with but 
$12,000,000 of legal tenders and $4,600,000 in specie, while 
the other banks, with net bankers' deposits of $20,000,000, 
had almost the same amount of legal tenders and $10,000,- 
000 in specie. It will thus be seen that in mid- August, 
before the withdrawals of money to the interior began, 
the banks which were certain to experience the greatest 
loss on that account were somewhat weaker than the other 
banks. A month later, the eve of the crisis, found these 
banks, which were chiefly responsible for the maintenance 
of the credit machinery of the country, distinctly less well 
supplied with cash than those banks whose operations a 
were of a purely local character. It is not surprising, ii 
therefore, that the shock of the crisis soon forced the ' 
interest - paying banks to resort for aid to their more 
conservative neighbors. 

THE OUTBREAK OF THE CRISIS. 

Two failures which preceded the crisis deserve mention 
because they were due to the same causes as those of more 
importance which came a little later. The New York 
Warehouse and Security Company was forced to suspend 
on September 8. Organized to make advances on grain 
and produce, it had been induced to finance the Missouri, 
Kansas and Texas Railroad. On Saturday, September 13, 
came the failure of the important banking house of Ken- 
yon, Cox & Co., ov/ing to indorsements on $1,500,000 of 
the paper of the Canada Southern Railroad. These fail- 
ures, while causing considerable disturbance in the stock 



35 



National Monetary Commission 

market, were not regarded as of far-reaching importance. 
The disasters and panic of the last three days of the fol- 
lowing week have been described by many later writers, 
but a contemporary account will best serve to picture 
the situation which had to be faced by those responsible 
for the working of the credit machinery of the country. 
For this reason copious extracts from the weekly money 
market summary of the Commercial and Financial Chron- 
icle are appended: 

The disturbances of last week on the annoucement of the failure of the 
New York Warehouse and Security Company, which were not regarded at 
the time as having any general significance, have this week been followed 
by one of the most serious financial crises ever knov/n in our market. For 
the prime cause of these difficulties it is necessary to go back a few months 
and bring to mind the excessive tightness of our money market, which pre- 
vailed without interruption from September, 1872, to May, 1873, at times 
almost prohibiting the sale of new railroad bonds, and requiring the issue 
of large amounts of railroad paper for the prosecution of the several enter- 
prises. Together with this, and partly connected with it, came the failures 
of quite a number of smaller railroad companies to pay their interest, caus- 
ing a feeling of distrust and aversion toward new railroad bonds, which has 
been quite perceptible for some months past. Under these circumstances 
several of the banking houses negotiating large railroad loans, or intimately 
connected with the building of the roads, became heavily responsible to 
their respective companies by the indorsement of notes, or by borrowing 
largely on call loans secured by pledge of the railroad securities as collat- 
eral. In this delicate situation the equilibrium was liable to be violently 
disturbed, as subsequent events have most unfortunately proved. 

The first shock came with the suspension on Saturday, 13th instant, of the 
well-known stock-brokerage house of Kenyon, Cox & Co., in which Daniel 
Drew is a general partner, the cause being that the firm were indorsers on 
about $1,500,000 of Canada Southern Railway paper, a part of which fell due 
on the 15th, and they were either unable or unwilling to assume the sole 
responsibility of paying it. This suspension, although important in stock 
circles, was of far less general influence than that of Messrs. Jay Cooke & 
Co., which occurred on Thursday, and of Fisk & Hatch, which was announced 
on Friday morning, and followed by the failures of a number of 
smaller stock-brokerage firms during the day. The immediate cause of 
Messrs. Jay Cooke & Co.'s suspension was the large advances made by the 
Philadelphia house to the Northern Pacific Railroad, which together with 
a heavy drain of late from their depositors so reduced their cash resources 

36 



Crises Under National Banking System 

that they were unable to continue. The excitement and general distrust 
which followed this suspension caused a general and rapid calling in of loans, 
and precipitated the misfortune of Messrs. Fisk & Hatch, and with the great 
fall in stocks produced the other disasters. It seems much more proper to 
refer to these disasters as temporary suspensions rather than failures, and 
there is scarcely a doubt that most of the firms will be able to settle their 
affairs and resume business in a short time, their resources and those of 
their individual partners being known in many cases to be very large. 

The excitement in Wall street and vicinity was intense, and was height- 
ened by a run on the Fourth National Bank and the Union Trust Company, 
the bank remaining open after its usual hours and meeting every demand, 
and the trust company paying depositors during the day, and being re- 
ported abundantly aljle to meet its liabilities, provided money could be 
obtained on first-class securities. 

The bank officers have been in council, and will take measures to furnish 
every possible relief to the market, and it is expected that the Secretary of 
the Treasury will, if possible, use a part of his currency reserve to purchase 
5-20 bonds, or will otherwise give assistance to the banks. At the close of 
business there was a more hopeful feeling and a belief on the part of many 
that the worst of the panic had been seen.o 

Amidst the great confusion and excitement which has been prevalent in 
financial circles since the date of our last report, and the occurrence of 
important events crowding one upon another in rapid succession, it is 
somewhat difficult to give a review of the past week which shall be at all 
satisfactory. 

On Saturday morning, 20th instant, the markets opened with wild ex- 
citement, in consequence of the numerous suspensions of banking and 
brokerage firms on the previous day, and the closing of the Union Trust 
Company and the National Bank of the Commonwealth that (Saturday) 
morning. The suspension of the trust company was alleged to be caused 
by its inability to get call loans paid in, or of realizing or borrowing on 
securities, but in addition to its other troubles a defalcation of its secretary, 
Mr. Carleton, was discovered to the extent of about $500,000, and the 
company was placed in the hands of Mr. E. B. Wesley as receiver, who has 
not yet made a report, but promises a favorable one soon. Among the 
most important loans of the company was one to the Lake Shore and 
Michigan Southern Railroad for $1,750,000, and which falls due, we believe, 
in January next. 

The failure of the Commonwealth Bank was occasioned by permitting a 
banking firm to overdraw their account some $200,000, and the bank has 
also gone into a receiver's hands. If the accounts be true, it appears that 
the depositors both in the bank and trust company will be almost or 

o Commercial and Financial Chronicle, September 20, 1873, p. 382. 



37 



National Monetary Commission 

wholly free from loss whenever the market becomes settled so that securi- 
ties can be sold at a fair price. 

At the Stock Exchange excitement was so high and prices were declining 
so rapidly that the governing committee met about ii o'clock a. m. and 
decided to close the exchange immediately until further notice, which was 
accordingly done. This was a coup d'etat, and at the time was considered 
by some members to be rather a high-handed proceeding, though under the 
light of subsequent events it has met the unqualified approval of the whole 
business community." 

THE CIvOSING OF THE STOCK EXCHANGE. 

The Stock Exchange remained closed fpr ten days, until 
September 30, an event which was wholly unprecedented 
and which was not found necessary in later crises. Not 
unnaturally the impression has been drawn that the situa- 
tion in 1873 was peculiarly desperate, but such a conclu- 
sion, so far as it is based upon the closing of the Stock 
Exchange, rests upon a misunderstanding of the real occa- 
sion for that drastic measure. It was a result of a cumber- 
some mode of transacting business, which required the co- 
operation of the banks in ways which were often illegal 
and which absorbed a disproportionate share of their 
credit facilities. The method of daily stock delivery pe- 
culiar to American exchanges always causes trouble in 
time of crisis, though this difficulty has been greatly 
diminished since the establishment of the Stock Exchange 
clearing house in 1892. In 1873 every transaction on the 
exchange involved a payment with a certified check. 
The method of business was thus described in a contem- 
porary journal: 

From the comments made upon the cases which the panic has brought 
to light of brokers' "overdrafts" it is evident that the public knows very 
little of the system upon which Wall street houses transact business and 

o Ibid., September 27, p. 410. 
38 



Crises Under National Banking System 

effect daily "clearances" of an enormous amount of stock. * * * 
Temporary "overdrafts" are the rule and not the exception with most of 
the banks in the vicinity of the Stock Exchange. No other way has }'^et 
been devised through which a broker's "clearances" can be effected. 
Most houses with an "average deposit" of from $10,000 to $20,000 in 
bank have to receive and deliver from $100,000 to $500,000 worth of stock 
or gold per diem; larger houses, proportionately larger values. * * * 
Almost every banker or broker in good credit has an arrangement, definite 
or implied, with his bank, by which he is allowed to largely overdraw his 
balance — in payment for blocks of stock — with the understanding that 
before 3 p. m. of the same day he shall deposit the certified checks of other 
people in amount sufficient for the redemption of his own checks and the 
maintenance of a respectable " balance." On the latter the bank makes its 
profit. Large houses often open accounts of this sort with several banks 
at once. * * * The whole system is perilous and illegal. * * * 
When, as now, they suspend this usage, all business has to stop." 

On September 24 the stock exchange committee sent 
the following communication to the committee of the 
clearing house : 

The great obstacle we have to deal with in resuming the operations of 
the Stock Exchange is * * * the mode of settling our transactions. 
As long as the banks on whom checks are drawn are distrustful of each 
other, so long will a condition of unreasoning panic continue, and the 
demand on all sides will be for "greenbacks" rather than for "certified 
checks," which may turn out worthless within twenty-four hours after 
they have been accepted in payment. To reopen the Stock Exchange 
under this condition of affairs would simply, therefore, be the inauguration 
of a run upon the banks for legal tenders, with what results you are better 
qualified to judge than ourselves. * * * Xhe true plan, in the present 
emergency, in our opinion, is that those banks who are content to make 
clearances with each other, should, to the extent of their associated capital, 
guarantee the payment of checks certified by the banks allowed to enter 
the clearing house. * * * It is necessary to have the moral courage to 
sacrifice the weak members of your present association, rather than to have 
all the banks of New York suffer the disgrace of a suspension of payments.'' 

With reference to this proposal, it was observed by the 
Times : 

This, we submit, is neither reasonable nor, under the trying circum- 
stances of the day, to be expected. The banks cleared last week an average 

« New York Tribune, September 24, 1873. 
& New York Times, September 25, 1873. 

39 



National Monetary Commission 

of $109,000,000 per day. The last of the brokers' checks were cleared on 
Monday of this week, when the total clearings fell to $83,000,000. On 
yesterday (Tuesday) the total fell to $49,000,000; this morning to 
$45,000,000. The question, therefore, recurs. Is it right that, after the 
Stock Exchange is reopened, the associated banks should (in violation of 
law, so far as the national banks are concerned) certify for $50,000,000 
or $60,000,000 a day? The mere statement of the case supplies the 
answer. * * * The sooner the clearing house stops clearing and certi- 
fying for the Stock Exchange the better; forcing the exchange to provide 
other means of clearing among themselves. <» 

The reply of the clearing-house committee was equally 
unfavorable. They refused the request with the laconic 
observation that it was too exclusively to the convenience 
and safety of the exchange.^ 

The disturbing consequences of our system of dealings 
on the Stock Exchange will be seen in the course of later 
crises. Here it may be noted that it tends to create an 
exaggerated idea both in other countries as well as at 
home of the seriousness of American crises. The Stock 
Exchange was at length reopened on September 30, though 
at first only a moderate business could be carried on, as 
the banks refused to overcertify checks for the brokers, 
but with the resumption of monetary ease the banks 
resumed their former relations with them. 

GOVERNMENT ASSISTANCE. 

The Secretary of the Treasury was strongly urged to 
intervene to relieve both the foreign and the domestic 
exchange situation, but he wisely refused to strain if not 
exceed his lawful authority.'^ Government assistance was 
limited to the redemption of bonds in currency, offers 
being accepted at prices not exceeding par in gold. 
During the week beginning Saturday, September 20, 

o Ibid., September 25. & Ibid., September 28. ^See p. 322. 

40 



Crises Under National Banking System 

more than $27,000,000 in excess of receipts was paid out 
at the subtreasury in New York, but not all of this 
amount was a net addition to the available supply of 
money. Rather more than $17,000,000 was in exchange 
for certificates of deposit which by the act of June 8, 
1872, were issued to national banks in denominations 
of not less than $5,000 upon the deposit in the Treasury 
of an equivalent amount of legal tender notes. The 
purchases of bonds, including the premium paid, set free 
$12,966,000 in currency, while ordinary receipts and 
disbursements very nearly balanced.*^ 

Further assistance was beyond the power of the Treas- 
ury, unless the $34,000,000 of legal- tender notes retired 
in 1866 and 1867 were to be reissued, as its currency hold- 

a The receipts and payments on all accounts at the subtreasury in New 
York between September 20 and September 27, 1873, were — 
Receipts: 

Transfers from depositary banks (currency) $i, 249, 985. 80 

Transfers from treasury offices — 

Currency 730, 000. 00 

Coin 1.513.615-39 

Duties on imports, etc. (coin) 2,535,458. 12 

Miscellaneous collections (currency) 139,617.28 

Total receipts 6, 168, 676. 59 

Payments: 

Treasury warrants paid — 

Currency i , 356, 74 1 . 92 

Coin 1 , 822, 763. 47 

Certificates of deposit redeemed (currency) _ . 17, 475, 000. 00 

Bonds purchased — 

Principal (currency) 11, 708, 100. 00 

Premium (currency) 1,255,582.93 

Interest (coin) 200,922.31 

Total payments 33,819,110.63 

This statement was prepared by the Treasury Department at the 
request of the writer. 

41 



National Monetary Commission 

ings, not including those held for the redemption of cer- 
tificates, were exhausted. This expedient had been 
resorted to earlier in the year to meet a temporary 
deficiency in funds, but, though strongly urged by 
some of the distressed financiers in New York, the Presi- 
dent and the Secretary of the Treasury refused their 
consent. In the second week of October, however, the 
Treasury, again on account of the deficiency in revenue, 
began to entrench upon the so-called "currency reserve," 
but the payments at that time were not large and had no 
influence upon the monetary situation. 

Even the $13,000,000 of currency paid out by the Treas- 
ury were of slight service in relieving the situation. The 
purchased bonds came almost entirely from the savings 
banks, and they were not willing to deposit the proceeds 
with the clearing-house banks. It would have been far 
more satisfactory had the money been deposited with the 
banks by the Treasury, but at this period such deposits 
were not customary beyond the amount required to facili- 
tate government business. It is somewhat surprising to 
find that the United States bonds on hand, held by the New 
York national banks, amounting to about $3,500,000, 
were not returned to the Government in exchange for 
currency. These bonds, however, were widely scattered 
among the 50 national banks. Only two of the banks 
held any considerable amount of them, and as they were 
perhaps the two strongest banks in the city it may be 
presumed that they felt that they had contributed suffi- 
ciently to the relief of the general situation in joining the 
currency pool described on a subsequent page. 



42 



Crises Under National Banking System 

THE EFFECT OF THE PANIC ON THE NEW YORK BANKS. 

We now return to our subject proper and follow the 
effects of the panic upon the banks. On Saturday, Sep- 
tember 20, two trust companies, after withstanding runs 
for a short time, were obliged to close their doors. One 
national bank also failed. The two trust companies were 
able to resume — one on October 15 and the other early 
in December. The bank was liquidated with no loss to 
creditors. Its solvency had been long in question, and 
its business was of small proportions, with loans in the 
neighborhood of $2,000,000. Its failure, therefore, was 
not one of the serious factors in the situation. The 
trouble of the trust companies had more important imme- 
diate consequences. Their reserves were principally in 
the form of deposits with New York national banks, and in 
their unavailing effort to meet the runs upon themselves 
they had drawn out considerable amounts of money 
from the banks. Reports of withdrawals by individual 
depositors from the banks generally are also found in the 
newspapers of the day, but in the case of but one bank, 
the Fourth National, were these withdrawals sufficient in 
size to reach the proportions of a rim. Distrust of this 
bank was excited because of its large dealings with brokers, 
the numerous failures and suspensions among whom gave 
rise to a fear that the bank must have been compromised. 
The Fourth National Bank was at that time one of the 
largest banks in the city, having deposits of $30,000,000, 
almost equally divided between individual and bankers' 
deposits. Distrust of this bank was, therefore, a most 
serious matter. Finally, the banks were receiving urgent 
demands for funds by telegraph from their banking cor- 
6158—10—^4 43 



National Monetary Commission 

respondents in all parts of the country. Private bankers, 
such as Jay Cooke & Co., seem to have held at least rela- 
tively larger deposits payable on demand both from in- 
dividuals and banks than is now customary.'^ More- 
over, outside banks seem to have lent considerable sums 
in New York directly to brokers, as well as through the 
medium of their reserve agents. The failures and sus- 
pensions of bankers and brokers therefore weakened 
the out of town banks directly, to say nothing of the 
alarm which was excited among their own depositors. 
Recourse to deposits with their reserve agents was there- 
fore in some instances necessary and in others was far 
from being a product of unnecessary fear. 

The effects of these various demands upon the banks in 
New York can not be exactly determined since the weekly 
bank statement shows only the average condition of the 
banks for the week ending with Friday night. The state- 
ment for September 20, therefore, probably shows some- 
thing like the actual condition of the banks on Tuesday or 
Wednesday, just before the panic began. It is, however, 
inserted here as better than no statement whatever : 



Loans 

Deposits 

Circulation 

Specie 

Legal tenders 

Reserve percentage. 
Reserve deficit 



Amount. 



15278, 421, 700 
198, 040, 100 
27, 414, 200 
18, 844, 800 
34.307. 900 
23-03 
$3, 211,07s 



Changes from previous 
week. 



Decrease. 



SO, 114, SSo 
9, 277, 400 



I. 597. 700 
2,409.300 



50, 800 



I. 695,050 



o Bankers' Magazine, November, 1873, p. 320. 
44 



Crises Under National Banking System 

CLEARING-HOUSE LOAN CERTIFICATES. 

There can be no doubt that the very considerable con- 
traction of $6,114,000 in loans was far less than that 
which had actually taken place, and this is also true re- 
garding changes in other important items in the statement. 
But to allay the panic it was absolutely necessary to 
secure the cessation of further contraction. Nothing 
could be more certain than that the continuance of loans 
was necessary, not only to prevent the spread, of failure 
to other branches of trade but also to save the banks 
themselves from loss and even bankruptcy. The stock- 
exchange situation was such that it would have been 
worse than useless to attempt to reduce appreciably the 
amount of call loans. Outside bankers might follow that 
course, but for the banks of the city it was both their 
duty and their interest to sustain the local situation and, 
so far as possible, to prevent further failures. The neces- 
sity for the adoption of this policy was clearly recognized, 
and on Saturday, September 20, the following arrange- 
ments were adopted to meet the situation by the New 
York banks in the Clearing House Association: 

That in order to enable the banks of the association to afford additional 
assistance to the financial community, and also for the purpose of facili- 
tating the settlement of the exchanges between the banks, it is proposed 
that any bank in the Clearing House Association may, at its option, deposit 
with a committee of five persons, to be appointed for that purpose, an 
amount of bills receivable or other securities, to be approved by said com- 
mittee, who shall be authorized to issue thereupon to said depositing bank 
certificates of deposit bearing interest at 7 per cent per annum, in denomi- 
nations of $5,000 and $10,000, such as may be desired, to an amount not 
in excess of 75 per cent of the securities in bills renewable so deposited; 
except that when the securities deposited shall consist of either United States 
stock or gold certificates the certificates of deposit may be issued upon 



45 



National Monetary Commission 

the par value of such securities. These certificates may be used in settle- 
ment of balances at the clearing house for a period not to extend beyond 
November i, and they shall be received by creditor banks during that 
period daily in the same proportion as they bear to the aggregate amount 
of the debtor balance paid at the clearing house. The interest which ma)'' 
accrue upon these certificates shall, on November i or sooner, should the 
certificates be all redeemed, be refunded and apportioned among the 
banks which shall have held them during that time. The securities 
deposited with the committee as above named shall be held by them as a 
special deposit, pledged for the redemption of the certificates issued thereon. 
The committee shall be authorized to exchange any portion of the said 
securities for an equal amount of others, to be approved by them, at the 
request of the depositing bank, and shall have power to demand additional 
security, either by an exchange or an increased amount, at their discretion. 
The amount of certificates which this committee may issue, as above, shall 
not exceed $10,000,000. The banks shall report to the manager of the 
clearing house every morning at 10 a. m. the amount of certificates issued 
by them. This arrangement shall be binding upon the clearing house 
Association when assented to by three-fourths of its members. 

That in order to accomplish the purposes set forth in this agreement the 
legal tender belonging to the associated banks shall be considered and 
treated as a common fund, held for mutual aid and protection, and the 
committee appointed shall have power to equalize the same by assessment 
or otherwise, at their discretion. For this purpose a statement shall be 
made to the committee of the condition of such bank on the morning of 
every day, before the opening of business, which shall be sent with the 
exchanges to the manager of the clearing house, specifying the following 
items: 

"(i) Loans and discounts; (2) amount of loan certificates; (3) amount 
of United States certificates of deposit and legal-tender notes; (4) amount 
of deposit, deducting therefrom the amount of special gold deposits. 

" That the bank to which loan certificates may be issued be charged, in 
addition to 7 per cent interest, one-quarter of i per cent to defray the 
expenses consequent upon carrying out this plan. 

"F. D. Tappen, 
"President of Clearing House."C' 

These arrangements were virtually the same as those 
which had been adopted and which had proved strikingly 
successful in i860 and again in 1861.^ It will be ob- 

o Commercial and Financial Chronicle, September 27, 1873. 
& Loan certificates were also issued in 1863 and in 1864, but apparently 
for special purposes of no general importance. 



46 



Crises Under National Banking System 

served that two fairly distinct powers were given the 
clearing-house committee: The right to issue clearing- 
house loan certificates, and control over the currency 
portion of the reserves of the banks. The loan certifi- 
cates could be used solely in settling balances between 
the banks, though of course no obstacle was placed in 
the way of a bank which might choose to meet its unfavor- 
able balances in the usual way by cash payments. This 
arrangement was devised after the crisis of 1857,^ accord- 
ing to tradition by George S. Coe, of whom we shall hear 
much a little later. The purpose of the certificate was 
to remove certain serious difficulties which had become 
generally recognized during that crisis. The banks had 
pursued a policy of loan contraction which ultimately 
led to general suspension, because it had proved impos- 
sible to secure any agreement among them. '' The banks 
which were prepared to assist the business community 
with loans could not do so because they would be certain 
to be found with unfavorable clearing-house balances in 
favor of the banks which followed a more selfish course. 
The loan certificate provided a means of payment other 
than cash, and what was more important, it took away 
the temptation from any single bank to seek to strengthen 
itself at the expense of its fellows, and rendered each bank 
willing to assist the community with loans to the extent 
of its power. 

The use of certificates did not diminish in the slightest 
degree the obligation to pay cash to depositors on demand. 
On previous occasions its use had not led to the suspen- 

oSee note, p. 419. &C. F. Dunbar, Economic Essays, pp. 278-83. 

47 



National Monetary Commission 

sion of cash payments, and although suspension followed 
within a few days after the issue of the certificates in 
1873, it can not be too strongly insisted that their use 
had no direct bearing upon that unfortunate step.* 

In addition to the arrangement for the use of loan certi- 
ficates, provision was also made for what was called the 
equalization of reserves. This provision was an essential 
part of the arrangement devised in i860 to meet crisis 
conditions, and it requires especial attention because this 
is the only crisis since the organization of the national 
banking system during which it was adopted along with 
the issue of the clearing-house loan certificates. 

The banks were not, of course, equally strong in reserve 
at the time the loan certificates were authorized. From 
that moment they would be unable to strengthen them- 
selves aside from the receipt of money from depositors 
except in so far as the other banks should choose to meet 
unfavorable balances in cash. Moreover, the withdrawals 
of cash by depositors would not fall evenly upon the banks. 
Some would find their reserves falling away rapidly with 
no adequate means of replenishing them. The enforced 
suspension of individual banks would pretty certainly 
involve the other banks in its train. Finally, it would 
not be impossible for a bank to induce friendly depositors 
to present checks on other banks directly for cash pay- 
ment, instead of depositing them for collection through 
the clearing house and probable payment in loan certifi- 
cates. The arrangement for equalizing reserves therefore 

a In the later crises of 1893 and 1907 there was, as we shall see, a close 
connection between the issue of the certificates and suspension. See pp. 
182 and 272. 

48 



Crises Under National Banking System 

diminished the likeUhood of the banks' working at cross 
purposes — a danger which the use of clearing-house cer- 
tificates alone can not entirely remove. 

These arrangements had enabled the banks to pass 
through periods of severe strain in i860 and in 1861 with- 
out suspension. In both instances the use of the loan 
certificate was followed immediately by an increase in the 
loans of the banks, and in no short time by an increase in 
their reserves. The situation in 1873 was more serious, 
and as events proved, the reserve strength of the banks, 
while sufficient to carry them through the worst of the 
storm, was not enough to enable them to avoid the resort 
to suspension. 

The opinion has been expressed by a high authority 
that these arrangements should have been adopted on 
Thursday, and that the delay of two days involved serious 
consequences which might have been averted.'* The im- 
pending failure of Jay Cooke & Co. seems to have been 
disclosed to certain New York bankers on Wednesday, ^ 
and it is difficult to see how its seriousness can have been 
underestimated. But the Clearing House Association's 
officers were entirely from the more conservative mercantile 
banks, and very likely they did not at first perceive the 
gravity of the situation, and probably knew nothing of 
the Cooke failure until it occurred. 

Let us consider once more the condition of the banks 
on September 20, the day when the clearing-house loan 
certificates were authorized. They held $18,800,000 in 
specie, but this specie was useless in meeting the require- 

« Dunbar, Theory and History of Banking, p. 84. 
&F. Oberholtzer, Life of Jay Cooke, Vol. II, p. 422. 

49 



National Monetary Commission 

ments of ordinary depositors. From the total of 198 
millions of deposits we may offset the specie holdings, 
leaving 180 millions of deposits payable in legal-tender 
notes. Against this liability the banks held $34,300,000 
in greenbacks, or 19. i per cent. But as the return was 
for the average condition for the week the banks must have 
been in a considerably less satisfactory condition than is 
indicated by this statement. In conclusion, it should be 
remembered that the banks entered upon this struggle 
with panic conditions with no means of adding to their cash 
resources. They could not increase their note issues; the 
money paid out by the Treasury in the purchase of bonds 
did not reach the banks; and gold imports were of slight 
service, because gold was not the medium of the ordinary 
business of the country. 

On Monday, September 22, the first business day 
under the regime of clearing-house loan certificates and 
of the greenback pooling agreement, it soon became 
evident that the worst stage of the panic had been passed. 
Notwithstanding temporary relapses upon the announce- 
ment of further failures on this and the two following days, 
improvement was reasonably steady and unquestioned. 
The banks took out loan certificates freely, and on Wed- 
nesday the ten millions authorized were entirely exhausted. 
The drastic contraction of loans which had taken place 
during the previous week was over. Runs upon particular 
banks in the Clearing House Association ceased, since now 
the reserves of all the banks were at the disposal of any 
threatened institution. The banks in general, however, 
experienced some further loss of cash from individual 



50 



Crises Under National Banking System 

depositors whose alarm was too extreme to be allayed 
by the clearest evidence of the continuance of normal 
banking operations. More considerable withdrawals, in 
some instances reaching the proportions of runs, were 
reported by the savings banks. These banks, of course, 
carried little or no cash reserves, and the withdrawal by 
them of money to their credit with the clearing-house 
banks must have been an important factor in the deple- 
tion of their stores of cash. By resorting to their legal 
privilege of requiring notice from depositors, the savings 
banks were soon able to remove themselves as a disturbing 
force from the field of action. 

Had all the New York banks been purely local institu- 
tions, with no responsibilities to the rest of the country, 
there can be little doubt that they would have been able 
to weather the storm without further difficulty. But the 
most considerable withdrawals of currency which they 
had to meet came from the out-of-town banks, and de- 
mands from that quarter showed no signs of diminishing, 
but rather increased day by day. During the turmoil 
of Friday and Saturday reports were current that money 
was not being shipped to interior banks.'* Amid the 
rush of business during those two days it may well have 
happened that shipments of currency were delayed, but 
at the beginning of the following week it is entirely 
reasonable to conclude that the New York banks were 
fully meeting their obligations to their banking corre- 
spondents when we find Chicago papers mentioning 
liberal remittances from New York to that city and to 

oSee Chicago Tribune, September 24, 1873. 
51 



National M o n e t ar y Commission 



other centers.'* Unfortunately, the New York banks 
were unable to continue this wise and salutary policy for 
many days. Meeting every demand from their deposi- 
tors, they had already during the first three days of this 
week done much to restore confidence, but at the close 
of business on Wednesday, September 24, they were left 
with a supply of greenbacks so scanty that they could 
hardly hope to maintain payments until with the restora- 
tion of confidence the normal course of currency move- 
ments would bring money to their depleted reserves. 

The actual condition of the banks at this time (Wed- 
nesday, September 24) is fairly well indicated by taking 
the bank statement showing average conditions for the 
week ending Friday, September 26, though, if anything, 
it probably presents a stronger condition than was actually 
the case. The following table shows the condition of the 
New York banks for the week ending September 26, 1873: 



Loans 

Specie 

Legals 

Deposits 

Circulation 

Reserve deficit 

Reserve percentage 



p2(>6, 811, 800 
12. 937.300 
21, 229, 100 
174, 527, 800 
27, 327, 600 
16, 297, 450 
16. 97 



Changes from 

previous week 

(decrease). 



gll 


609, 900 


5 


907, 500 


13 


07S, 800 


23 


S12.300 




86,600 


ai3 


076.37s 



In analyzing the changes shown by this table, account 
must be taken of the elimination of the failed Common- 
wealth Bank. The contraction of loans shown by the 

a See Chicago Tribune, September 24, and also New York Tribune, Sep- 
tember 23. 



52 



Crises Under National Banking System 

table should be reduced by $1,900,000, but the net con- 
traction of $9,700,000 is large, though most if not all of it 
belonged properly to the previous week. All reports agree 
that the banks resumed lending operations upon the issue 
of clearing-house loan certificates. The absence of the 
Commonwealth Bank doubtless accounts for the reduction 
of $86,000 in circulation, as the circulation of that bank 
was $230,000. It was not a time when the banks would 
be likely to keep any of their notes out of circulation. 
The deposits of the Commonwealth Bank were $1,692,000, 
specie holdings $15,800, and their legal tenders $476,600 — 
amounts which do not appreciably affect conclusions 
drawn from the bank statement of the week. The reduc- 
tion of more than one-third in reserves, especially in legal 
tenders, may be looked at from two points of view. It 
shows the enormous extent of the demands which had been 
met by the banks, and credit should certainly be given 
the clearing-house committee for the brave effort which 
was made to meet every obligation of the members of the 
Clearing- House Association. But the proportion of re- 
serve was reduced in one week from 23 per cent to 16.97 
per cent, and if we take the proportion of currency to de- 
posits, less the amount of specie, it was reduced from 19. i 
per cent to 13.1 per cent. 

SUSPENSION IN NEW YORK. 

It is reasonable to believe that success would have 
crowned the efforts of the clearing-house committee to 
handle the situation if the reserves at their disposal had 
been somewhat greater at the beginning of the disturbance. 
If they had been able to draw upon any outside funds, it 

53 



National Monetary Commission 

is probable that they would have persisted in the policy 
of unrestricted payments. Had the Treasury deposited 
the $13,000,000 which was used in the purchase of bonds, 
something would have been gained. The relief which had 
been experienced at the beginning of the week, when the 
banks proved able to continue payments, was so great 
that the public, unaware of the depletion of the reserve 
did not see the necessity of resorting to further measures — 
measures which could not fail to disturb trade and weaken 
confidence. But the banks were clearly at the end of 
their resources, and the step taken on Wednesday, Sep- 
tember 24, seems amply justified. Another issue of 
$10,000,000 of clearing-house loan certificates was author- 
ized — a measure which introduced no change in the policy 
hitherto folio wed. '^ In addition the following momentous 
resolution was adopted: 

That all checks when certified by any bank shall be first stamped or 
written "Payable through the Clearing House." 

The adoption of this resolution involved the partial 
suspension of cash payments by the banks. It did not 
signify that no money whatever would be paid out to 
depositors, but it placed the dwindling supply of currency 
more absolutely within the control of the clearing-house 
committee. In later crises this restriction of cash pay- 
ments has been carried to extremes, and the banks have 
not thereafter allowed their reserves to fall away, but have 
even greatly increased them with little regard to or per- 

ct Another issue must have been authorized later, as the maximum amount 
outstanding, on October 3, was $22,410,000. This wa5 equal to 8.35 per 
cent of the loans of the banks, and may be compared with the maximum 
issue of $88,420,000 on Dec. 16, 1907, which was 7.52 per cent of loans at 
that time. 

54 



Crises Under National Banking System 

haps better realization of the effect on the business com- 
munity. In 1873 money continued to be paid out by the 
banks — indeed almost as freely as before — especially to 
the banking depositors of the banks. That the reserves 
were used freely is shown by the following table which 
contains the bank statement from September 27 to No- 
vember 8, the entire period during which its publication 
was discontinued : ^ 



i 

1 Loans. 


Specie. 


Legal 
tenders. 


Deposits. 


Circulation. 


Sept. 27 


$266,811,800 


$12. 937. 300 


$21, 229, 100 


$174,527,800 


$27,327,600 


Oct. 4 


268, 408, 700 


io,*35, 500 


12, 012, 700 


156, 402, 300 


27,425,900 


Oct. II 


265,593.900 


ir, 919, 900 


10, 178, 800 


156, 004, 600 


24, 451, 600 


Oct. 18 


261, 366, 100 


13.388,500 


6, 280, 500 


153. 794.900 


27,453, 400 


Oct. 25 


254, 896, 200 


13, 270, 600 


8. 777. 700 


150.397. 700 


27, 422,300 


Nov. I 


253. 232,400 


14, 972, 600 


14, 724, 900 


155,844, 200 


27,413, 700 


Nov. 8 


249.277,300 


16, 878, 000 


21, 040, 200 


157.967.500 


27, 434,800 



The bank statement of October 4 showed a loss of 
$9,000,000 of currency and of some $2,000,000 in specie. 
During the following two weeks there was a further loss of 
currency to the amount of $6,000,000, the statement of 
October 18 showing only $6,280,500 of legal tenders. 
Owing to gold imports, the specie holdings had somewhat 
increased and amounted to $13,338,000. There was then 
a reserve deficit of $25,648,000, exceeding by nearly 
$6,000,000 the actual reser\^ of $19,664,000. The pro- 
portion of the total reserve to liabilities was only 10.85 
per cent, to deposits alone 12.79 per cent, and the pro- 
portion of greenbacks to deposits, less specie held, was 
only 4.47 per cent. On October 14 the legal-tender re- 
serve was at the lowest point, at $5,800,000, having been 

oThis table is taken from the Bankers' Magazine for May, 1875, p. 857. 

55 



National M o n et ar y Commission 

reduced from $34,000,000 on September 20.*^ The cur- 
rency movement then turned in favor of the banks, at 
first slowly, but by the end of the month rapidly, and by 
the middle of November the banks were again above their 
reserve requirements. 

In the subsequent crises of 1893 and 1907 the banks 
followed an entirely different course after cash payments 
were restricted, and bent every energy to the immediate 
strengthening of their reserves. It is this difference in 
policy that gives importance to the study of the crisis in 
1873. In making free use of their reserves the clearing- 
house committee exhibited a determination and strength 
of purpose which can not be too highly praised. As will 
be seen in our study of the course of later crises, the banks, 
when they suspended in 1873, were far less well supplied 
with funds and were also imable to secure additional 
currency from any source. In 1907 suspension was more 
complete and continued for a longer period than in 1873, 
and its disturbing effects upon the trade of the country 
seem to have been far more serious. Further comparison 
must be deferred to a later stage in this investigation, 
but with this end in view it will be seen that a detailed 
analysis of the course of the crisis of 1873 after suspension 
is of the utmost importance. 

THE CURRENCY PREMIUM. 

The first and most immediate consequence of partial 
suspension by the New York banks was the appearance 
of a premium upon currency in terms of certified checks. 

« See p. 94. 



56 



Crises Under National Banking System 

The rumor that this action was under discussion by the 
clearing-house authorities is said to have caused the pre- 
mium to appear late on Wednesday, but the first quota- 
tion which found its way into the daily journals was for 
Thursday, September 25, when the premium was reported 
as ranging from one-half to 3>^ per cent. The following 
table presents the currency premium for each day during its 
continuance, showing the highest and lowest quotations: 



Date. 



Sept. 25 . 

26. 

27- 

28. 

29. 

30- 
Oct. I . 



Quotations. 



'As 'A 
1^-4 
2-4 
Sunday. 

2-S 
2-4 

2-3 A 

1-3 

%-iA 

%-i a 

Sunday. 

A-i 

K-i Va. 

A-iU 



Oct. 



15- 
16. 
17- 
18. 
19- 



Quotations. 



A-iVa, 
A-i 

Sunday. 

A- A 

A~A 

A-i 

Close at T^ 

H-A 

^-A 

Sunday. 

A- A 

Nominal. 

yi-A^ 



<» In Philadelphia 3-4. *> Bank notes at par. 

[This table is taken in the main from reports in the New 
York Tribune and Times; these failing, from telegraphic 
reports in the Boston Advertiser and the Chicago Tribune.] 

The fluctuation in rates on some days was often consid- 
erable. It is possible that the lower rate may refer to the 
price paid by brokers for currency and the higher rate to 
the price at which they sold it to customers. There were, 
however, wide differences both in supply and demand 
from hour to hour, and especially high rates were regu- 
larly paid for currency in quantity. It will be observed 



57 



National Monetary Commission 

that the premium ruled at a fairly high rate for some ten 
days, followed by a week during which rates were in the 
neighborhood of i per cent and then by another week 
when the rates were nominal. As a positive factor in the 
situation the currency premium had a duration of less than 
three weeks. 

FOREIGN EXCHANGE. 

The course of both the foreign and domestic exchanges 
during crises is exceedingly difficult to follow and to 
explain. Their derangement has an immediate and far- 
reaching effect upon the movement of commodities 
between different parts of the country and for export, 
and if continued for any length of time leads to the 
serious interruption of the ordinary productive activities 
of the people. In the case of the crisis of 1873, unlike 
that in 1857, the disturbance of the foreign exchange 
market was of short duration. On Friday, September 19, 
it was reported that the market was demoralized, and on 
Saturday that foreign exchange was blocked, and for 
several days during the following week newspaper reports 
agree that mercantile bills were practically unsaleable. 
It was stated that foreign exchange dealers could not 
dispose of their own drafts on London, and that they 
were unwilling to take the risk of purchasing bills in the 
disturbed state of affairs. By the end of the week, how- 
ever, conditions became more satisfactory, and on Friday, 
September 25, $2,500,000 was taken from the Bank of 
England for export to the United States. This was the 
beginning of a considerable movement which continued 
until the end of October, a total of $15,000,000 being sent 

58 



Crises Under National Banking System 

to the United States from Europe. This inflow of gold in 
itself was of less importance than upon other occasions of 
crisis, because the business of the country was being 
carried on upon an inconvertible paper basis, but it is an 
indication that the blockade in the foreign exchanges had 
been effectively broken. 

It remains, however, to determine just what had 
brought about this improvement in the foreign exchange 
situation. The view has gained ground in recent years 
that the currency premium which has appeared in our 
successive crises has been a chief factor in stimulating 
gold imports, and consequently in bringing about the 
continuance of dealings in foreign exchange. In 1873 110 
expression of this opinion has been discovered, and it 
may be asserted with confidence that at no time has the 
currency premium exerted more than a secondary influ- 
ence on the course of foreign exchange dealings. 

Comparatively little capital has been employed in this 
business by American foreign exchange houses, and until 
recently the banks did not engage directly in such opera- 
tions at all. Commercial bills drawn against American 
exports are regularly discounted at once in Europe, and 
against the credits thus secured abroad drafts are drawn 
and sold here so far as the demand allows. The banks 
appear as a factor in these dealings when the funds of the 
exchange dealers are not sufficient to meet the temporary 
excess of bills purchased over drafts sold, or in the case of 
gold imports during the time the gold is in transit. At 
the outbreak of a crisis, due to domestic causes, the 
demand for drafts is certain to fall off, and if the exchange 

6158—10 5 59 



National Monetary Commission 

houses are to purchase bills and import gold the banks 
must supply the funds during the period of shipment. 
It has already been pointed out that the banks were 
probably not making any new loans during the latter part 
of the week ending September 20, and those of the first 
part of the following week probably served only to satisfy 
the most urgent needs of their customers and check 
liquidation. But the issue of a second ten millions of 
clearing-house loan certificates, authorized on Wednesday, 
September 24, seems to have enabled the banks to do 
more than that, since the bank statement of October 4 
shows an increase in loans of some $2,000,000. The 
advances of the banks enabled the exchange houses to 
resume the purchase of bills, thus preventing the threat- 
ened cessation of commodity exports. The currency pre- 
mium had no direct bearing on the matter; exchange 
rates and the gold premium moved up and down with 
changes in the currency premium, since they were both 
expressed in terms of depreciated certified checks.*^ 

The temporary blockade in foreign exchange was 
chiefly felt in the grain and produce markets. From 
Chicago, on Friday, September 19, it was reported that 
"the shipping movement was partially paralyzed by the 
news from New York that sterling exchange was unnego- 
tiable."^ Through the following week the situation re- 
mained serious. The movement of wheat to the Atlantic 
ports fell off, and in consequence the elevators and stock 
yards became crowded to their utmost capacity, and 

o For a further discussion of this matter, see pp. 191 and 282. 
& Chicago Tribune, September 20, 1875. 



60 



Crises Under National Banking System 

shipments from primary markets were necessarily re- 
fused by the raihoads.'^ The price of wheat fell off 
sharply — from $1.13 on September 19 to 90 cents on 
September 24. With the resumption of foreign-exchange 
dealings at the end of the week shipments were renewed, 
and the wheat quotation was again above $1 on Septem- 
ber 29. Cotton was not affected so seriously by the for- 
eign-exchange situation, other causes contributing to the 
sharp decline in its price from 19X to 17^ cents per 
pound. The movement of the crop was only just begin- 
ning, and of course difficulties of storage were absent. 

SUSPENSION THROUGHOUT THE COUNTRY. 

The maintenance of the usual system of payments 
between different parts of the country is a problem 
wholly unlike that of the foreign exchanges. Continu- 
ance of cash payments by the New York banks, rather 
than the continuance of loans, is the essential require- 
ment. Local business can be carried on after a fashion 
with certified checks payable only through the clearing 
house, and foreign-exchange transactions, except when 
gold is being exported, may be characterized as a local 
business. If, however, the banks of the money centers 
refuse or even delay the shipment of funds deposited 
with them, the thousands of country banks will inevit- 
ably discontinue remittances upon items sent to them 
for collection. But is the reverse equally inevitable? 
If the initiative is taken by the country banks, is that 
sufficient reason for the discontinuance or restriction of 
the shipments of money to the interior by the banks of 

a Chicago Tribune, September 25, 1875. 
61 



National M on et ar y Commission 

the money centers? The answer is most certainly and 
decidedly in the negative. The banks in the money 
centers reap great advantages from their position as 
clearing centers and as reserve agents. They incur a 
responsibility for maintaining the credit situation which 
does not rest upon the other banks. 

Finally, what has been said of money centers generally 
in relation to the country banks applies with even less 
qualification to the responsibilities of the New York 
banks, to the banks of other money centers, and, indeed, 
to the banks of the entire country. There is always a 
chance that the New York banks, by meeting every 
demand upon them for cash, may be able to reestablish 
the ordinary course of payments between banks in dif- 
ferent parts of the country, while nothing that the coim- 
try banks and those of the secondary money centers 
may do can possibly bring this about. It follows, there- 
fore, that even though in 1873, or on later occasions, 
some of the banks outside New York may have restricted 
payments before the suspension in New York, the general 
dislocation of the domestic exchanges is properly to be 
attributed to the banks of that city. A danger, there- 
fore, which had been merely threatening became a real- 
ity at the moment the action of the clearing-house banks 
on Wednesday, September 24, became generally known. 
Similar steps were immediately taken in most of the sec- 
ondary money centers. In Boston, Philadelphia, Balti- 
more, Washington, New Orleans, Cincinnati, and St. 
Louis the issue of clearing-house loan certificates, and at 
the same time the use of certified checks, payable through 



62 



Crises Under National Banking System 

the clearing house, were sanctioned.'^ We have aheady 
seen that the use of loan certificates does not necessarily 
involve suspension, but the fact that both measures 
were taken together in many places not unnaturally 
gave rise to the erroneous impression that suspension is 
an inevitable consequence of the issue of loan certificates. 
Moreover in many cities, Chicago being the most important, 
as well as by the country banks generally, suspension of cash 
payments was quite as complete, even though they did 
not resort to the loan certificate. In many instances the 
banks made public the reasons which led them to restrict 
payments, and as they afford a clear idea of the situation 
as it presented itself in different parts of the country 
they are here given in some detail: 

Savannah. — The Chamber of Commerce, September 26, held an ad- 
journed meeting at 10 o'clock at night to receive the report of its com- 
mittee, who presented the following: 

Resolved, That the banks and banking houses of Savannah will only- 
meet demands of depositors by certification of checks, to be used as the 
necessities of the holders may require, until the temporary difficulties are 
removed, and until exchange can be negotiated or currency be received 
to move the crops. 

The banks are acting according to this resolution. 

New Orleans. — At a meeting of all the bank presidents in New Orleans, 
September 25, it was resolved to pay no check for more than $100. All 
larger checks are to be certified, and the arrangement to continue thirty 
days. This action is considered precautionary to prevent a drain. The 
merchants generally approve of the course the banks have taken. 

The following address was issued by the banks of this city: 

The undersigned, incorporated banks and bankers of the city of New 
Orleans, desire to inform the community of the motives which actuate 
them in partially suspending payment of currency upon their demand 

<* For resolutions and statistical data regarding the issue of loan certifi- 
cates in all these cities except Washington see James G. Cannon, Clearing- 
Houses pp. 91-7. For Washington the return to the Comptroller for 
October 13, gives an issue of $28,000. It is in the case of that city the 
only reference I have found. 

63 



National Monetary Commission 

obligations, owing to a partial suspension of currency payments by the 
associated banks of New York and other northern cities, and the conse- 
quent refusal of the western and other banks to receive checks on New 
York, as is the regular course in the settlement of collections made here 
for their account. It is ascertained that a very large remittance of cur- 
rency hence has been made upon peremptory orders within the past five days. 
To such an extent indeed has this prevailed that at the same rate only a 
few days must elapse before our vaults and the community would be 
entirely depleted of the means essential to the ordinary movement of trade. 
At the present moment foreign exchange is unsalable in New York, and as 
we derive from this source our main supply of currency we are now thus 
deprived of the only means of restoring the amounts lost by shipments 
to the West and the interior. We have therefore taken this step as a 
means of self-protection, and for the benefit of the agricultural as well 
as the commercial interests, and as the only means through which the 
incoming crops can be moved without ruinous sacrifice in prices. The 
duration of this protective policy is limited to a period of thirty days, 
during which time we are confident that the daily receipts of cotton and 
sugar will afford us a prompt and ready relief, and compel currency to 
seek this market. 

Maryland. — Officers of the associated banks of Baltimore met Sep- 
tember 25, and resolved, in view of the present financial situation, not to 
pay out money on checks except what may be required for legitimate 
business purposes, the banks to certify all good checks which can be used 
in business transactions. It is confidently believed here that the banks 
in the city were never in a sounder condition than at present, and their 
action this afternoon is recognized as a prudent precaution against any 
panic. The president of the German Savings Bank states that deposits 
are in excess of the amounts drawn from the bank. Mercantile and com- 
mercial interests of the city, while experiencing to some degree the general 
pressure and tightness in money, are regarded as being on a safe and sound 
basis, no failures being at present anticipated. As elsewhere, trade is 
very limited, no heavy transactions taking place. The feeling to-day, 
sympathizing with the favorable dispatches from New York, is much 
better than for several days previous, and it is confidently expected that 
business will soon revive. 

St. Louis, Mo., September 25. — A slight run having been made on the 
banks of St. Louis on the 25th of September, it was decided at a meeting of 
bankers to suspend the payment of checks or drafts, either in currency or 
exchange, until the excitement in the East subsides and the former condi- 
tion of the markets is restored. Shipments of flour to the East having been 
virtually suspended by the recent advance in railroad freights, the board of 
directors of the Merchants' Exchange have petitioned railroad companies 
to restore the old rate during the present financial troubles. 

Ohio. — ^The Cincinnati Clearing-House Association has adopted the 
following resolution: 

. 64 



Crises Under National Banking System 

"Resolved, That for the protection of our commercial interests, and for 
the purpose of preventing a drain of currency from the banks and bankers 
of this city, we do hereby agree to adopt substantially the plan adopted 
in New York, viz: They will not pay out currency on checks except for 
small sums, to be optional with the banks upon whom they are drawn, 
but they will certify checks drawn on balances in their hands, payable 
through the clearing house only." 

Each member of the Clearing-House Association is required to deposit 
such sum, in approved securities, as will at all times cover the amount 
of his clearings. Government bonds are received at their par value. 
Railroad and other stock and bonds and bills receivable are received at 
75 per cent of the value fixed on them by the committee. Loan certificates 
are issued by the committee, which can only be used in the settlement of 
balances between the banks, and are not negotiable. The banks have 
since resumed currency payments as usual. 

Rhode Island. — An adjourned meeting of the Providence banks, 
September 30, received and adopted the report of a committee recom- 
mending a liberal policy on the part of banks toward each other and 
customers; that each bank should request its depositors to draw checks 
payable through the clearing house, and should certify checks payable 
through the clearing house; that deposits made in banks in currency be 
paid out to such depositors in currency, and that deposits made in certified 
checks be paid in kind. The Providence banks are in a generally sound 
and strong condition. 

Nashville. — The national banks of Nashville, four in number, in view 
of the present state of financial affairs, have agreed to suspend currency 
payments on all balances exceeding $200. The board of trade, at a 
large and full meeting, unanimously approved of the course of the banks, 
and adopted a resolution that merchants and business men would continue 
to deposit with and aid the banks by every means in their power. A 
general good feeling prevails among business men, and there are no symp- 
toms of a panic.o 

The following news items are taken from the Boston 
Advertiser and the Chicago Tribune: 

Indianapolis, September 26. — The clearing house adopts suspension of 
currency payments for two days. 

Philadelphia, September 26. — The clearing house resolves that the banks 
will not pay out any more currency except what is actually needed for the 
payment of wages. 

Dubuque, Iowa, September 27. — Only one national bank is meeting its 
demands in full in currency; one other has suspended payment entirely; 
a third pays in bills receivable, and small amounts in currency. 

<i Bankers' Magazine, November, 1873, pp. 383-393. 
65 



National M o n et ar y Commission 

KnoxvillE, Tenn., September 27. — Banks here suspended currency 
payments. 

Newport, September 29. — All the banks suspend currency payments. 

LowEivi., September 29. — Decision to limit currency payments to $50, 
unless in cases of strong necessity. The $200,000 due on pay rolls this 
week will be amply provided for. 

Concord, N. H., Septem-ber 29. — Banks limit currency payments to 
small amounts. 

Cairo, III., September 29. — Adopts Cincinnati plan of suspension. 

Worcester, Mass., September ^p.^No concerted action, but banks 
"will avoid any obvious attempt to draw away greenbacks to New York, 
by paying large demands from out of town in cashiers' checks on Boston 
or New York." 

Harrisburg, Pa., September 28. — Banks and savings institutions agree 
to suspend currency payments. 

Louisville, September 29.— K clearing house formed and a majority of the 
banks resolve to limit currency payments to small amounts. 

Albany, September 29. — Banks working under New York plan. 

Kansas City, September 25. — Banks resolve that "we decline payments 
of checks or debts over our counters either in money or exchange; second, 
that clearing-house balances shall be carried to the extent of 75 per cent of 
approved collaterals. 

Davenport, Iowa, September 26. — Banks limit currency payments to 
$100. 

Leavenworth, Kans., September 26.— Six banks agree to suspend 
currency payments. 

Finally attention is called to the following reports of the . 
action of the Chicago banks : 

The clearing-house association has voted [September 24] to recommend 
the suspension of currency payments on any large demands made upon 
them either from the country banks or over their counters.^ 

Since Monday (September 22) or Tuesday last some of the banks of this 
city which have large deposits from country banks have been unable to 
return those balances in currency as fast as they were drawn for. * * * 
Other banks, and by far the larger number, having to deal only with city 
depositors, have been paying all demands upon them, both over the counter 
and at the clearing house. 

The banks vary largely as to what is a " small check; " some pay $25, some 
$1 ,000, some 25 or 30 per cent of depositor's account. The great difficulty is 
that the Chicago banks are not united, but rather are trying to get the advan- 
tage of each other. & 

<i Chicago Tribune, September 25. & Ibid, September 26. 



66 



Crises Under National Banking System 

Chicago bankers, on the evening of September 26, met and refused to issue 
clearing-house certificates; but appointed a committee on the question.^ 

The action taken by the Boston banks is particularly 
instructive. The banks of that city were not subject to 
such heavy demands for crop-moving purposes from their 
banking correspondents as were those of New York and 
of the western and southern cities. They were also in a 
fairly strong position at the beginning of the crisis, having 
some $10,000,000 in cash against $62,000,000 of deposits. 
Payments were continued after suspension in New York, 
with the consequence that Boston exchange at once com- 
manded a premium in New York, and was being eagerly 
purchased. On this account the banks on September 
27 adopted a plan similar to that which had been adopted 
in New York, but with no provision for the equalization 
of reserves. 

With the close of the week ending September 27 partial 
suspension had taken place throughout the country, aside 
from the Pacific coast, where the banks were upon a gold 
basis, and where general business was largely independent 
of that in the rest of the country. Up to the time of sus- 
pension there had been no failures of consequence in 
general business, and no failures of banks outside of New 
York, except those in Philadelphia and Washington, in con- 
nection with the failure of Jay Cooke & Co. Confidence 
in the banks had not been seriously weakened, and there 
were few reports of runs and of hoarding by individuals 
outside of New York. The course of trade had not as yet 
been seriously disturbed except in the grain and produce 

a Ibid, September 27. 
67 



National M o n et ar y Commission 

markets in Chicago. With the beginning of the following 
week newspapers began to refer to "the late panic," and 
with reason; there was no further panic during 1873, 
though the crisis had only begun and although the effects 
of suspension which had been brought about by the panic 
had yet to be experienced. There is every reason there- 
fore to accept the explanation put forward by the banks 
that suspension was due to the action of the New York 
banks, action which, as we have already seen, was due to 
the lack of any adequate reserve in New York at the 
beginning of the crisis. 

HOARDING. 

When once the banks had resorted to suspension, vari- 
ous causes of disturbance, till then of minor importance, 
became serious. The amount of actual money required 
for a given volume of transactions was greatly, increased. 
Uncertain whether the banks would provide the money 
which they might shortly need, many persons began to 
discontinue paying into the banks cash received in the 
course of their daily business. On September 30, for 
example, one of the Boston banks reported that many of 
their customers were depositing their currency in their 
own safes. '^ The currency premium also tended to keep 
money from finding its way into banks. Many retail 
shops in New York, it was said, sold to brokers their 
receipts in currency. Positive hoarding also seems to be 
increased by suspension, even though some money is 
brought into use by the possibility of realizing a profit 
from its sale at a premium. In 1873 at any rate the 



^Boston Advertiser, September 30, 1873. 
68 



Crises Under National Banking System 

amount of money thus brought to Ught was unquestionably- 
more than offset by the amounts which were locked up in 
savings banks. In New York alone the savings banks were 
estimated to have held from $13,000,000 to $20,000,000, 
and they were severely criticised for withholding this 
money from the channels of trade. '^ Such criticisms 
would have been well founded if the commercial banks 
had not resorted to suspension. The savings banks, hav- 
ing required thirty days' notice from depositors, were 
properly justified in holding themselves ready to meet the 
demands of those depositors who had already given notice. 
Aside from the savings banks, very little was said about 
the hoarding of currency, but there is direct evidence that 
as in later crises it threatened to assume alarming pro- 
portions. Fortunately the banks, at least those at New 
York, adopted the only wise and effective remedy: 
Money was paid out freely, and the hoarding propensity 
vanished. On October 1 3 and on November i the Comp- 
troller of the Currency asked for special reports of the con- 
dition of the national banks, and thus secured a mass of 
statistical data showing the monetary effects of the crisis 
which is unique in banking history. It is much to be re- 
gretted that this precedent was not followed in later crises. 
On September 12, the date of the regular returns of the 
national banks, they held $112,958,000 in legal-tender 
notes. On October 13 they held $86,435,000, a loss of 
$26,523,000, or more than 23 per cent. On November 
I they held $100,722,000, a gain of $14,287,000. More 

o Commercial and Financial Chronicle, October i8; New York Tribune, 
October 20 and 21; Boston Advertiser, October 15. 



69 



National Monetary Commission 

than half the loss had been recovered. When it is re- 
membered that this was the crop-moving period, it will 
be seen that no considerable amount of money lost by 
the banks was then being hoarded by depositors. 

The date of the first of these special reports, October 
13, happened to have been at the moment when the banks 
were at the lowest point in reserves. From about the 
middle of October money began to flow back into the 
banks, and by the close of the month the resumption of 
normal relations between banks and depositors was almost 
completely reestablished throughout the country. As a 
seriously disturbing influence, suspension continued for 
less than three weeks. 

The return of money to the banks and the resumption 
of cash payments may be due to influences quite opposite 
in nature. The complete prostration of business may 
diminish the use for money outside the banks, and also 
the requirements of borrowers for loans. This is the 
undesirable avenue of escape from suspension when it is 
prolonged over a considerable period of time, so that the 
dislocation of the domestic exchanges places a serious 
check upon the movement of commodities between dif- 
ferent parts of the country. An instance of this nature 
will be afforded in the case of the crisis of 1907. In 1873 
it is not unlikely that suspension would have been thus 
prolonged had not the New York banks continued to meet 
their obligations to the utmost limit of their reserves. As 
has already been stated, money was shipped to the banks 
of the interior in large quantities after the resort to partial 
suspension, and this action had the most reassuring effects 



70 



Crises Under National Banking System 

on the banks and the people elsewhere. Currency began to 
be sent to New York by banks in other parts of the country 
as early as the first week in October. On October 3 it was 
even reported that receipts had exceeded the amount 
which was required for the needs of the out-of-town banks. 
Resumption came gradually and not at the same moment 
throughout the country, but by the end of October it was 
virtually complete except in a few Southern cities. 

PAY ROLIv DIFFICULTIES. 

The most immediate effect of partial suspension is the 
difficulty of securing money for various purposes, espe- 
cially for pay rolls. In 1873 there were numerous re- 
ports from different parts of the country of inability to 
secure money for this purpose, though trouble on this 
account was probably much less than in later crises, 
because of the custom of paying wages monthly, which 
generally prevailed at that time. It is, however, a 
cause of trouble which may be largely removed by means 
of substitutes for money, such as certified checks and 
local script of various kinds. Were trade purely local it 
is probable that it would take but a short time for a com- 
munity to adjust itself to suspension, if not without in- 
convenience, at least sufficiently well to permit the con- 
tinuance of ordinary business payments. 

The following news items will serve to illustrate the diffi- 
culties which arose from the refusal of the banks to sup- 
ply currency to their depositors, though it should be noted 
that in many instances of the shutting down of factories 
other causes were also potent. It is not always certain 



71 



National M on et ar y Commission 

that the lack of currency was due to the suspension of the 
banks. InabiHty to secure loans or to make collections 
may in many cases have deprived producers of the ex- 
pected bank balances which would have given them the 
right to demand currency. 

In the Boston Advertiser for September 30 it was re- 
ported that: 

E. Howard & Co. (watch and clock makers) had closed part of their 
works. Unable to make New York collections or to obtain Boston accom- 
modations without great diflSculty, "and being unwilling to swerve from 
the long-established practice of meeting their heavy pay-roll obligations 
weekly, they have decided to give a portion of their hands a fortnight 
release from labor." The American Watch Company, of Waltham, also 
discharged one-sixth of its force (150 in all) on September 29, "on account 
of the unsettled condition of the money market." J. P. Squire & Co. 
discharged 100 men on Saturday (September 27), "because of the general 
troubles in financial matters." At Taunton banks have suspended tem- 
porarily. "The firms having large pay rolls feel the contraction the most." 

The following dispatches from a . number of widely 
separated cities are taken from the Chicago Tribune: 

Toi,EDO, September 29. — The various manufacturing establishments 
about town report some embarrassment caused by the crisis, such as 
difficulty in obtaining money to pay their hands, and the large tobacco 
factories have not been able to ship for four or five days on account of 
their inability to procure currency to purchase stamps. It may be neces- 
sary to dress up the stock again before shipping, as it will not sell readily 
after a prolonged stay at the factory in packages. About 40,000 pounds 
of "fine cut" has accumulated. — Chicago Tribune, September jo. 

St. IvOUIS, September 30. — On account of the scarcity of currency, one 
prominent lumber firm suspended operations to-day, and discharged their 
men, and one or two other establishments will do the same if money is not 
easier within two days. — Chicago Tribune, October i. 

Pittsburg, October 3. — A meeting of manufacturers resolved, "That in 
order that the employee and ernployer may each contribute to the best 
interests of this community, and relieve our moneyed institutions from the 
excessive drain of currency, we commend that the manufacturers only 
make payment not to exceed one-half of the amount to our employees on 
each pay day on and after this date until the currency and exchange of 
the country assume their normal condition." — Chicago Tribune, October 4. 



72 



Crises Under National Banking System 

Cleveland, October 5. — No manufacturers are embarrassed so far as 
can be seen. All the heaviest ones are paying in full in cash; a few paying 
half and two-thirds in cash, the balance in orders on stores — Chicago 
Tribune, October 6. 

Baltimore, October 6. — Some factories discharged a portion of their 
hands; others paid half wages in cash and rest in due bills. The bills 
have been generally peid. — Chicago Tribune, October 7. 

Finally, attention is called to a number of items of a 
somewhat later date from the New York Tribune : 

Philadelphia, October 11. — A number of Frankford cotton mills are 
running on half time in consequence of falling off of orders and difficulty 
of procuring currency to pay wages. — New York Tribune, October ij. 

Pittsburg, October 14. — Report from Brady's Bend to effect that ex- 
tensive ironworks had closed; also the cotton mills in Allegheny, osten- 
sibly for repairs. "It is feared that unless the banks resume their discount 
business many business interests will be seriously crippled." — New York 
Tribune, October ij. 

At Johnstown, Pa., the Cambria Iron Works has given notice to em- 
ployees that the company finds it impossible to make collections or to sell 
for cash or to raise money in any other way to make the usual monthly cash 
payments, and gives notice of intention to pay as soon as possible. " While 
the company will guarantee to employees all necessary supplies to the 
extent of their earnings, no regular cash payments need be expected until 
cash can be obtained for products of the works." 

On Monday of last week (October 20) the Pittston and Elmira Coal 
Company suspended because of lack of money to pay its workmen. On 
Thursday arrangements were made, and work was resumed to-day (Octo- 
ber 27). 

At Newburgh the "steam mills" have stopped (October 25), owing to 
the money stringency. Four hundred persons are thrown out of work. — 
New York Tribune, October 27. 

Utica, October 27. — The Remington gun factory at Ilion has been seri- 
ously embarrassed in obtaining currency to pay off its hands. " There 
has been very little trouble of that kind in this city (Utica), as the banks 
have done all that lay in their power to accommodate business men, and 
have been materially aided by the Savings Bank of Utica, which has 
deposits exceeding $3,000,000 and supplies large amounts of currency to 
the banks of discount. — New York Tribune, October 28, 1873. 

Rochester, October 28. — There has been some difficulty among Roches- 
ter manufacturers on one or two occasions in getting currency to pay their 
help, but in no case has there been more than two or three days' delay in 
payment. The banks discount very little, but in other ways have done 
all they could to facilitate business. 



73 



National Monetary Commission 

At Auburn there is great complaint of scarcity of money, "but, with 
the exception of one or two instances at the beginning of the panic, the 
banks have been able to furnish currency enough to pay off the operators 
employed in the workshops." The Frisbie steam fire-engine works 
are running on short time. Plenty of orders, but ho collections, "and 
the company finds it difficult to get money to pay off their hands. 
The engines are sold on long credit to corporations, and, while the securi- 
ties are ample, it is impossible to negotiate them for money." Other 
manufactories closed or curtailed for same reason.— A/'ew York Tribune, 
October jo, iSyj. 

Providence, October 28. — J. Y. Smith, ex-governor and leading cotton 
manufacturer, said that "there has been a good deal of difficulty — now in 
part past — in getting currency to pay wages, but our mills have paid fully 
in cash, and promptly." — New York Tribune, October 31. 

Taken together these reports seem to indicate a serious 
state of affairs, but it must be remembered that they are 
the most definite examples of pay-roll trouble which have 
been found in two New York newspapers and in one Bos- 
ton and one Chicago journal. The impression left upon the 
mind from the examination of contemporary newspapers 
is that upon the whole the banks generally supplied at 
least the more urgent requirements of their depositors. 
Pay-roll diffiteulties were certainly of short duration, dis- 
appearing shortly after the middle of October. Their 
place was taken by far more serious causes of trouble, 
which were not, however, of a banking nature. It would 
seem fairly certain that the following statement from the 
Boston Advertiser of October 22 was true for the country 
generally : 

"The financial disturbances have but just reached the 
large New England manufactories. Great concerns that 
had to pay out thousands of dollars to hundreds of em- 
ployees found it difficult then to get the money with 
which to cancel their pay-rolls, but most of them, in one 
way or another, did it. But now stock has piled up, and 
curtailment has become necessary." 

74 



Crises Under National Banking System 

It is not possible at this distant date to make any 
estimate of the extent to which various local substitutes 
for money were made use of. Scattered references to 
such devices, especially to those issued by municipalities, 
appear here and there in the newspapers, but they do 
not seem to have been so generally issued as in 1893 or 
1907." 

THE DOMESTIC EXCHANGES. 

A far more serious cause of disturbance from the sus- 
pension of payments is the dislocation of the domestic 
exchanges. In making payments at a distance local 
substitutes for money will not serve. When the banks in 
one locality refuse to remit to banks elsewhere upon 
drafts and checks sent to them for payment business 
must soon come to a standstill. The sudden and general 
trade prostration which can be brought about by this 
means is within the recollection of all from recent experi- 
ence. In 1873 the dislocation of the domestic exchanges 
could not have had so serious effects as at present because 
of the much less complete development of economic 
interdependence between different parts of the country. 
But after making every allowance on this account, there 
can be no question that the dislocation of the domestic 
exchanges, with its resulting trade consequences, was far 
less complete than in later crises. The exchanges were 
indeed deranged for a time, but they were never com- 
pletely blocked, except in Chicago, and serious derange- 
ment continued for but a few days at the end of September 

o See Chicago Tribune September 30, October 3 and 24 ; also New York 
Times, October i. 

6158—10 6 75 



National M o n et ar y Commission 

and the beginning of October. There were very few 
references to the matter in the newspapers of the time, and 
still more seldom is it mentioned among the chief causes 
of diificulty. The following are the most definite 
references to the effect of the dislocation of the exchanges 
which I have found: 

We learn that one effect of the present trouble has been to put a con- 
siderable check on the remittances of country tradesmen to the centers of 
wholesale trade. This is probably not because there is less money in the 
country to send, or because the retail merchants are unable to remit. The 
result of the practice, however, is detrimental to business, and checks the 
recovery from the panic, without helping those who cease remitting. « 

" The effect of the financial panic on the transportation business has been 
very serious. Ra,ilroad freight on all the principal lines from New York to 
the West has fallen off since the beginning of the panic from 25 to 50 per 
cent." Especially the west-bound freight; "The eastern-bound freight, 
which consists mainly of grain, has not been so seriously affected as yet, but 
unless western buyers, who are compelled to pay greenbacks for grain, are 
supplied by the banks with something besides certified checks, they say 
that the movement of produce eastward will soon cease. & 

In reducing to a minimum both the period and the 
effects of the suspension, all credit should be given to 
the clearing-house committee and to the more conserva- 
tive New York banks, which upheld it in its policy of 
meeting from the combined reserves of the members of 
the association the demands made upon the interest- 
paying banks by their banking depositors. Restrictions 
on cash payments in New York were confined chiefly, if 
not entirely, to dealings with local individual depositors; 
the banks elsewhere, finding that their requirements 
were being met, soon began to resume the ordinary 
course of business." 

(^Boston Advertiser, October i, 1873. 
6 New York Tribune, October 16, 1873. 
cSee p. 71. 



76 



Crises Under National Banking System 

As in the case of pay rolls, the impression which is 
derived from the examination of the newspapers of the 
time is, that though the dislocation of the domestic 
exchanges caused much inconvenience it did not lead 
to the serious interruption of business activities. It was 
not until nearly the end of October, when the suspen- 
sion of payments was already a thing of the past, that 
reports of the actual curtailment of production became a 
subject of daily report in the newspapers. At that time 
the more permanent causes of business depression were 
beginning to make themselves felt. The transition from 
business activity was gradual and seems to have extended 
beyond the close of the year. There was no sudden and 
universal trade prostration such as occurred in November 
and December, 1907, lasting during the period of sus- 
pension and then followed by considerable recovery to a 
condition of less severe though more prolonged depression. 
It is, therefore, reasonable to conclude that the temporary 
suspension of payments in 1873 had relatively little 
influence upon the course of trade. The weekly review of 
the dry goods trade in the Commercial and Financial 
Chronicle illustrates both the effects of suspension upon 
trade and the gradual appearance of trade depression, 
owing to the generally unsound condition of affairs 
throughout the country. As the course of events is not 
within the recollection of many readers, copious extracts 
have been taken from it : 

REVIEW OF THE DRY GOODS TRADE. 

Friday, p. m., September 26, 1873. 
There has been a fair jobbing trade in progress during the past week 
despite the unfavorable condition of affairs in Wall street. It was not 

77 



National M o n et ar y Commission 

expected that the monetary disturbances would have much effect upon 
trade in this branch, but as the panic continues and becomes more wide- 
spil&ad, the difficulty in effecting exchanges with the country is acting as a 
check upon further operations. There is a large indebtedness on the part 
of the country merchants to this market just now, and some fears are 
entertained for the safety of collections which should be coming in largely 
during the next thirty days. Some of our largest dry goods houses have 
asked their customers to ship currency instead of exchange, to relieve the 
city banks, and if this request be granted it will prove beneficial to the 
trade in a very marked degree. 

Friday, p. m., October 3, 1873. 

The week opened with comparatively little business doing, owing to the 
prolonged financial disturbances. Dealers from the interior were dis- 
trustful of the future, and limited their purchases to actual wants, which 
prevented the jobbing houses from doing a very heavy business and 
restricted the aggregate movement of the week. There was no feeling of 
insecurity on the part of the trade here until Wednesday, when the sus- 
pension of the house of Paton & Co. was announced, and the news came so 
unexpectedly as to create a very doubtful feeling among many of the 
trade regarding what might follow. This firm has been long established, 
and had a reputation for financial stability second to none in the market. 
It seems, from a statement by the firm, that their suspension was due 
solely to the monetary stringency, which prevented them from negotiating 
their paper for the last thirty days, and although such assistance was 
offered them by outside parties as would, under ordinary circumstances, 
have enabled them to weather the storm, they were unable to avail them- 
selves of it now, and were, therefore, forced to suspend temporarily. Tt is 
generally believed, however, that they will be able to resume business 
within a very brief time. We hear of no other failures, nor do the trade 
anticipate any. 

Friday, p. m., October 10, 1873. 

Closely following our last report came the suspension of Messrs. Peake, 
Opdycke & Co., jobbers, and although this suspension was not entirely 
unlooked for, its announcement did not fail to produce some effect upon 
the market, and to cause a slight feeling of distrust in the trade as to the 
stability of other houses. There has been an improvement of the exchanges 
with the interior since our last, and this fact helps the feeling at the close. 
The dullness and depression are looked upon b)' the trade as but temporarj^, 
and in view of the activity of our export trade and the liberal demand 
existing in the interior for all classes of goods, the probabilities are that 
there will be a liberal movement later on in the season. Settlements 
between agents and jobbers are reported as being promptly made. 

Friday, p. m., October 17, 1873. 
The financial condition of the dry goods trade seems to have improved 
somewhat during the past week, and there is a steadier feeling than at the 

78 



Crises Under National Banking System 

time of our last report. Jobbers, as a rule, are meeting their paper with 
a good degree of promptness, and where they ask for accommodations the 
commission houses generally show a disposition to accommodate them. 
The banks are rather more liberal with these houses, and are thus relieving 
the pressure considerably. Remittances from the interior, which are 
pretty liberal at this season of the year, are coming forward promptly, and 
many of the country merchants are discounting their bills to aid jobbers 
through the trying period. 

Friday, p. m., October 24, 1873. 
The current week has been about the dullest of the season in the dry 
goods market, and there is very litt'e news to note in connection with any 
line of fabrics. The jobbing trade has been for the most part restricted to 
the requirements of retailers in near-by localities, the merchants in more 
distant sections having already laid in pretty full supplies for their early 
trade. It is greatly to be regretted that the season which opened so au- 
spiciously, and with such brilliant prospects, should have been interrupted 
as this has been, but a very hopeful feature is the present reduced condition 
of stocks, which results from the liberal sales effected early in the season. 
Prices are now held pretty steadily, and the reduced production of nearly 
all classes of goods is likely to prove beneficial to the trade by preventing 
an accumulation of stock and a break in prices. Reports from the manu- 
facturing centers show that nearly all the mills, both cotton and woolen, 
are running on reduced time, while some of the largest corj^orations are 
preparing to stop entirely. Collections are fair, but, while the stringency 
is somewhat relieved, there is far from being an easy feeling in the market. 

Friday, p. m., October 31, iSys- 
There has been no general improvement in trade during the past week, 
but a steady jobbing distribution was etTected, and the indebtedness of 
buyers being met, as the rule with a good deal of promptness, the feeling 
and prospects were becoming rather more encouraging. On Tuesday the 
trade were excited over the rumored suspension of the Messrs. A. & W. 
Sprague, of Rhode Island, and their agents here, Messrs. Hoyt, Sprague & 
Co. Confidence was somewhat restored on Wednesday by the authorita- 
tive denial of the rumor, but was lost again on Thursday, when it became 
known that Messrs. Hoyt, Sprague & Co. had notified their bank to pay no 
more of their paper. The Messrs. Sprague, of Providence, have not, up 
to the hour of this writing, suspended, but are waiting the action of the 
Providence banks, which have promised to come to their aid with $1 ,000,000. 
Should they be thus assisted, they will probably be able to weather the 
storm, but otherwise their suspension seems likely. The Messrs. Sprague 
control some 280,000 spindles in Rhode Island and other States, and em- 
ploy in the manufacture of textiles probably not less than 10,000 men. 
Their interests are very extended, and are not confined to dry goods alone, 
although the bulk of their assets are probably in cotton mills and machinery. 
The suspension of Messrs. Hoyt, Sprague & Co. was not a thorough surprise, 

79 



National Monetary Commission 

but its occurrence has a generally depressing effect, and destroys confidence 
in the stability of other houses. There seems to be no immediate prospects 
of other suspensions, payments being met with a fair degree of promptness 
by both retailers and jobbers. 

Friday, p m., November 7, iS'^j. 

Trade has been stagnant for a week past, the attention of all classes of 
dealers being given more to the financial position of the market than to 
the transaction of business. At the opening nothing definite was known 
relative to the A. & W. Sprague Manufacturing Company, of Providence, 
or to their agents here, Messrs. Hoyt, Sprague & Co. The suspension of 
these concerns having become a settled fact, however, and their statements 
showing a large excess of good substantial assets over their liabilities, the 
uneasiness caused by their suspension was gradually decreased toward the 
close, and the interest now mainly centers upon the action of their creditors, 
who are endeavoring to devise some satisfactory means of settling up the 
affairs, so as to allow the concerns to proceed with their business. There 
has been considerable excitement during the week over the rumors re- 
garding Messrs. H. B. Claflin & Co., but as this firm showed assets about 40 
per cent in excess of their liabilities, and only asked their creditors for an 
average extension of four and one-half months on open accounts, which 
was promptly granted, the excitement has subsided. Messrs. Peake, Op- 
dycke & Co. have resumed business, and while the position of finances 
generally is liable to render temporary suspension necessary with any of 
our dry-goods houses, it seems to be the prevailing opinion that the trade, 
as the rule, are entirely solvent, and that no serious panic in this branch 
need be feared. 

The liberal auction offerings of last week, and the fact that importers 
as well as domestic houses were pressing goods upon the market at public 
sale, had the effect of drawing a large attendance of buyers from the interior 
into this market, but their presence has not been marked by any increase 
in the distribution through regular channels, and the week has been one 
of extreme dullness, with prices somewhat unsettled and rather favoring 
buyers. 

It does not fall within the scope of this investigation 
to follow the industrial history of either this or later crises, 
except in so far as may be necessary for the proper under- 
standing of banking problems. After the beginning of 
November the course of the crisis was determined by 
influences entirely outside the field of banking operations. 
The return flow of money to the banks, which began in 
the third week of October, was accelerated by the depres- 

80 



: nnd location uf bank. 



Date of organi- 



Offscts 
allowed 

nnd 
settled. 



Iioiinded or 

sold under 

order of 

court. 



Collected 

mcnt upon 
sluireholdcrs. 



rinallv ol.isi-,1. 



rirnl NuliciMiil lliink. Wnsliinitlon. U C 

Nullonnl llank of tlic Commonwealtli, New York, N. Y 

MrrchanO' Nnlinnnl Hank, relenburil. Va 

I'lml Nallonnl Hank. I>etcr«bure, Vn 

Mr«l Nallonnl Ilank, Mansfield. Ohio 

New Orlennti NutlonnI Hnnkins: Association. New Orleans, La. 

I'irsl Nnllonal Ilank, Carlisle, I'a 

First National Hank, Anderson, Ind 1 

I'irsl National Ihink.Topeka, Kans 

I'iril National Dank, Norfolk, Vn - - - 



July 
July 
.Sept. 

May 
May 
July 
July 
Aug. 
Feb. 



24, 1864 

37.1871 

7. 1863 
31.1863 
23.1866 
23. 1864 



Sept. 19, 1873 
Sept. 22, 1S73 
Sept. 23.1873 

do 

Oct. 18. 1873 
Oct. 23, 1S73 



24. 1873 
23.1873 
16,1873 
3.1874 



2.493,4M 
2,766,509 
1,019,841 



33S,433 
203,098 



S28o,9SS 
368,992 
103,843 

3.22S 

S.73S 
8,964 
7.06S 



8763.356 
589.213 
616.642 
146,764 
182,231 
715,584 



19.67s 
JOJ.813 



.374.339 

747.428 
259.487 
125.667 
107.258 
862, 263 
46.634 



May 
Nov. 
Mar. 
Dec. 

May 
Sept. 



6158 — 10 (To face page 81.) 



Name and location of bank. 



First National Bank, Washington, DC 

National Bank of the Commonwealth, New York, N. Y 

Merchants' National B ank, Petersburg, Va 

First National Bank, Petersburg, Va 

First National Bank, Mansfield, Ohio 

New Orleans National Banking Association, New Orleans, La. 

First National Bank, Carlisle, Pa 

First National Bank, Anderson, Ind 

First National Bank, Topeka, Kans 

First National Bank, Norfolk, Va 



6158 — 10 (To face page 81.) 



Crises Under National Banking System 

sion in general business, which diminished requirements 
for its use in general circulation. The returns to the 
Comptroller of the Currency of the condition of the 
banks on December 26 found them with a reserve 
$28,000,000 above that held on September 12, and greater 
than they had held at any time since June, 1871. There 
were also few banking failures either during or after the 
first outbreak of the crisis, and none of them were of great 
importance. 

The accompanying table, taken from the more compre- 
hensive tables which regularly appear in the reports of 
the Comptroller of the Currency, shows the results of the 
liquidation of the banks which failed during the panic 
and the year which followed . 

All of the failures which occurred during the crisis were, 
as was observed by the Comptroller of the Currency, due 
to "the criminal mismanagement of their officers or to 
the neglect or violation of the national-bank act on the 
part of their directors."'* 

It would not be difficult to find many quite normal 
periods during which both the number of failures and 
the losses of creditors were far more considerable than in 
1873. The solvency of the banks was at no time in 
question. The defects in the banking system which 
were disclosed were in its organization. It was made 
painfully evident that there was nowhere any reserve 
power with which to meet an emergency. Moreover, 
the banks were in what was for them a normal condition 
of strength at the time. The breakdown of the credit 

« Report of the Comptroller of the Currency, 1873, p. xxxv. 



National Monetary Commission 

machinery of the country could not be attributed to any 
unaccustomed lack of preparation. The defects which 
appeared were characteristic of the system, and they 
have reappeared with similar consequences upon every 
occasion of severe financial strain down to the present. 
The purely banking aspects of the crisis of 1873 may, 
therefore, be regarded as having practical significance, 
similar to that which may be derived from more recent 
experience, 

ANAIvYSIS OF BANK RETURNS. 

In order to avoid an interruption of the narrative of 
the course of the crisis during what may be called its 
"banking stage," detailed analysis of the condition of 
the banks has been deferred for separate treatment. It 
is a matter which deserves particular attention, since, as 
has already been stated, the statistical data is far more 
extensive than that which we have for the later crises of 
1893 and 1907, and influences affecting the position of 
the banks were sufficiently similar in the three instances 
to render any conclusions at which we may arrive from 
a study of the earlier crisis of something more than merely 
antiquarian interest. Abstracts of the regular return of 
September 12 and the two special returns for October 13 
and November i are presented in the accompanying 
table. The special reports included only the more impor- 
tant items of bank reserves and liabilities, and conse- 
quently the statements do not balance. That of No- 
vember I is of importance because it shows the rapid 
recovery of the banks, but requires no special analysis. 
Attention will be given chiefly to the changes which 

82 



KIMOUIICK*. 

;^on» niid dlKounU 

' )vt:rdrstttt -• *---^ 

(;,iiinfl Sinlf » h'Mdt to tecan clrcuUlion. . . 

i.iiii.'l :,Hit(it himttti to Mcure dtpotiit 

l;,iif..l MjI'-nbondianilK'turillMwi llan'I 

oilj. r Moi k», iMWidi, iind mitliiuiin 

Oiji' from oihtr noiff/ii»l l«iiili« 

Mm Irim other Imnln nnd l/ankcr« 
Hciil ii»(a«', tilrnllur'', nnd Oxliifi 
Ciirrenl <xi»nw« . 

I'roMiIiifnft 

OtncUn find ollirr ijkiIp i"'" 
Kxi'liiiiiKn 'w rf' uriiPK li""--'- 
lllll«i/ri.llirrmillMinll»iiikr, 
lirrKlloiiiil nirri'iir/ 

!i|>.'il.' 

Loujil lijnk-r luili '- 

Uiiltod HtolM mrlldinron n/ drpoili 



Tdlnl. 



MAniMTfUfi 

Hurplii'. riiriil 
lliiillvlili'il i>niril<i 

Nllllnlllll l,linli Mu;r»..(IIMIlllrhlr:- 
Hliilii'luilil'. liuli'n iilllnClilJilInu 

Iilvldmil'i xiiimlil 

Iiidlvliliji.t di'pmllo 

lllll(rdtlllll.'»ilc'|in)l(^i 

ni'ixiflllK I'l I'mIIi'I i'pluk'ii dliliiit'ilriu i>lli' 

lllir InlMillotmllmliko 

J nil' III nlliiT Imliln anil liiitikn 

lllllii liiiyiil)li< . 

'I' I 



S199. 160.987. 79 

lil.4S9 04 

jj. 870, 100. 00 

650,000. 00 

4.55a. 797- 00 

15.740,765-99 

2,077. a86, 04 

8. 469. 914. 33 

90s. 67a. II 

766, 179- 69 

3,058.769.53 

67.897.740.6!) 

3.618.58J.00 

338,394.3' 

14,585.810.55 

>i. -I'll. 5 J-- "" 

10.810,000.00 



389,486.310.48 



70,335.000. 

31.913,311.45 

11.310.470.03 

37. 48a. 343. 00 

i46.S>5.oo 

305.979.60 

167,513,663.74 

i";6,877.39 

40.397- "3 

).■. '57.769.35 

18,113,050.50 

6a. 135.39 

389,486,310.48 



AbrtracU of the reports of coruli:ion of ruilional bar.ks or. September i.. Odober 13. -"d .\V^*er ,. 1873. arranged by classes. 
SEPTEMBER la. SEPTEMBER la. 



RESOURCES. 

Loans and discoanU 

Ovwdrafts - 

United States bonds to secure circulation... 

United States bonds to secure deposits 

United States bonds and securities on hand. 

Other itocks, bonds, and mongascs 

rjuc from redeeming and reserve ae'riii . 

Due from other national banks 

Due from other banks and banker' 
Real estate, furniture, and 6xturcs 

Current expenses 

Premiums - 

Checks and other cash items 

Cxchantfcs for clearine house 

Hills of other national banks 

HilU of state l»anl;s 

Frtirlionul curnii. , 

Specie 

r^ffal-tendcr noK--- 

Untted States cerltficatc-; of cJfr">5il 

Clearing-house certificates - 



Total. 



LIADIUTII^S. 

Capital stock 

Surplus fund 

Undivided profits 

National-bank notes outstanding 

Stutc-bunk notes outstanding . 

Dividends unpaid 

Indlvifhtdl deposits 

United States deposits.. 

Deposits of United States disbursing ofiiccrs. 

Due to natioiiiil banks 

Due to other banks and bankers 

Notes and bills rcdiscountcd 

Bills payable 



Total. 



S262.323.070.82 

594.439-05 

89.591.050-00 

3.or6.ooo.oo 

I, 707.400.00 

4. 736.037-68 
33,279.436-SI 
10. 976. 896.48 
3.335.728-30 
8.601.528.73 
2.380.410.80 
1,639.890.56 
1,908.842.89 
21.028.362.84 
4. 955. 579- 00 

535.538. 90 
3.aio.970.07 
28.599.405.00 
7. 550. 000. 00 



489.356.698.6s 



127.164.985.00 

32,470,516. 75 

12,764.472.21 

77.800.560.00 

207. 127-00 

320.700.03 

172.065. 102.29 

1,496.332.71 

1.326.753.51 

43.649.018.01 

15.469.278.28 

1.349.053.58 

3. 272, 799. 28 



RESOURCE--; 

Loans and discounts - 

Overdrafts 

United States bonds to secure circulation 

United States bonds to secure deposits 

United States bonds and securities on hand. 

Other stocks, bonds, and mortgages 

Due from redeeming and reser\'e agents. 

Due from other national banks 

Due from other banks and bankers 

Real estate, furniture, and fi.xturcs 

Current expenses 

Premiums 

Checks and other cash items. — - — 

Bills of other national banks. 

Bills of state banks 

Fractional currency. 

Legal-tender notes - 

United States certificates of deposit 



Total. 



LIABILITIES. 

Capital stock 

Surplus fund --- 

Undivided profits. 

National-bank notes outstanding 

State-bank notes outstanding 

Dividends unpaid 

Individual deposits 

United States deposits — — 

Deposits of United States disbursing officers. 

Due to national banks 

Due to other banks and bankers 

Notes and bills rediscounted 

Bills payable 



Total. 



$478,549. 

3.209. 
264. S69. 



34Sfi 
914-03 
250.00 



«3 


SS4.6S4 


^S 


14 


696 


017 


59 


6 


609 


S59 


07 


17 


S90 


310 


13 


3 


699 


404 


oS 


5 


3S6 


773 


61 


7 


466 


300 


So 


S 


SOJ 
>5 


644 
836 


00 



293.673.631.00 

65.920.771-00 
30.540. 189.53 
233.798.897.00 

83s. 201.00 

875.868.26 

283, 107. 798. a6 
6.036. 117.63 
6.731.S09-49 
17. 76s. 945. 68 

s. 715.819.36 

4.638.458.78 
2, 145.639-42 



951.784.836.40 



SBPTSMBER xa 



KRSOVRCQS. 

Loans and discounts.,, ,-.__,_. .. ,. 

Overdrafts _--..,----.. 

United Slates bonds to secure circulfttion..,,.. 

United Slates bonds to secure deposats 

United States bonds and securities on hand - 

Other stocks, bonds, and mottfiages 

Due from redcewinc and reserve agents . . 

Due from other national bi\nks 

Due from other banks and bau^^n^ 
Real estate, furniture, and fixtiu. -^ 

Current expenses 

Premiums .--. 

Chocks and other casli items .. 

ISxchanges for clearing house 

Bills of other national banks 
Bills of state banks 



vncy. 



Specie 

I.cgixl-tcuder notes 

United States certificates of deposit . 
Clearing-house certificates. . . 

Total . 



Capital stock 

Surplus fund 

Undivided profits 

Nationnl-bnnk notes outstanding 

State-bank notes outstanding -. 

Dividends unpaid ,.-,--.,. 

Individual deposits ...«- 

United States deposits 

Deposits of United States disbursing ofliccrs. 

Due to national banks. 

Due to other banks and bankers. . ......... 

Notes and bills rediscounted 

Bills payable 



489.356.698. 6s 



Total. 



$940,933,304.2: 
3.986.812.1: 

388. 330, 400, 01 
14. Sos. 000.0 
8,834,850.0 

23. 709.034- s 

96, 134, lao. 6 
41, 413. 680. c 

iJ.032.873w 

34.661.823.; 

6, 98s. 436, < 

7.7S2.8.13.! 

11.433.913. 

SS. 926. 003., 

16, 076, So6.< 

27.037. 

J. 302. 774. 

14.868,469. 

oj. 347. 663. 

JO. 610, 000. 

17s. 000. 



54 


SIS 


131 


76 


339 


081 


799 


00 


I 


188 


8S3 


00 


I 


403 


547 


89 


633 


68s 


S63 


ig 


7 


839 


3n 


73 


8 


098, 560 


■ 3 


133 


67 a 


13' 


94 


39 


39S 


148 


• 4 


S 


987 


S13 


30 


5 


480 


SS4 


09 


1,830 


637,845 


S3 



ANll NDVUMIIliH 



OCTOBER 13 AND NOVEMBER 



OCTOBER 13 AND NOVEMBER i. 1873. 



OCTOBER ij AND NOVlvMBUU i. iS?,). 



hi illi<>'( 






I'liiii'il ,*-Uii(r. boiiilM on liiiiKt. 

Ollu'l- lltnv'kil, llfliulll, Ullfl IlKirtuiuIi's 

Mil;, frotii nil otllcr biuikH niul biinkc 

].{scliuiiuuh for cltriit'lnu liou.e 

NiitliuuiMinnU iioti'H. . - 

J>'viic(k>nttl I'urmu'y . 
Sprc'lc: 



liiiltl Uvusurj" iiotoH 



hI SImKmi «'illllonlca of Unponlt. 
hiu li"vi«. lonn corlincntd.H 



i.iAnii,iYiit.i. 



iMlllUillu IhltCi) QUtii(l)tKlllllI . 

in.sitHofnIIIciluU 

V (o nil bunks tuul bankers 



Nuilounl bnnka In Now York City, / 



Oct, IJ (48 bank.), 



•>»>, 957,564.33 
56, "77, 465.56 
3.359,750.00 
5,045.638.46 
16,040,556.00 
,365,334.55 



■17,534,501.34 
51,610.957. 14 
3,388,900.00 
4,717.651.37 
17, 365,913.65 

56,735,347. 



4,otlo,37t.oo 


5,460.589.00 


"■'•,953.37 


396,835.31 


1. ';1I.4I0,33 


1,353.657.00 


», 744,060. 00 


10, 145. 800. 00 


6,347,350.00 


14.638,453,00 


170.000,00 


1,040,000.00 


16. 330. 000. 00 


15.860.000.00 


.83,660. 354.5. 


300,058,604.81 


10.135,000,60 


70,335,000.00 


.7.851.306.00 


.7,835,613.00 


I31.030, 18..54 


■ 49.399,344. 14 


S5. 430, 674.5s 


54. 177.476. 36 



•84.547. 063.09 301,547,433.40 





Other redemption cities. 




Oct. 13 
(179 banks). 


Nov. I 
(179 banks). 


RHSOURCRS. 


5332,351,704.47 
35,182,338.44 
1,695,650.00 
4,939. 7^4. 26 

16. ii8,6Si.93 
'=.578.317.96 
17,066.389. 29 
4. 199,303.00 
585.0:6.61 

1.714.696. 68 
1.566.240.00 
28,243.165.00 
3. 150.000. oo 
9. 547. 477.37 


8218,374.649.64 
=3,982.356.53 








5,087, 384.53 

IS. 784.507.65 
....020,834.53 
20,798,045.37 
4.576.512.00 
486,521.06 


Due from approved redeeming niid reserve 


Dne from nil oilier banks and bankers 






Specie: 


Gold trensnry notes _ 


1.774. too. 00 
32. 168.429.00 

4.020.000.00 
II, 416.13s. 59 


United Stales certilicales oT deposit 






Total 


34S.957.624.9t 


356.390,326. 60 




LIAmUTIBS. 

Capital stock 

Circulutins notes outstandiuc 


i -0.172. 565. 00 
7?^. 090. 059.00 

■ 48. 081.974. 39 
46,017.750.49 


126,189.265.00 
78,220.298.00 

150.797.514.68 
49.936.547.70 


Due to nil bonks and bankers 


Total 


398. 363.34s. 88 


405,143.625.38 





Total. 



I.I.aBILITIBS. 

Capital stock _ 

Circulating notes outstanding. 

Deposits of all kinds 

Due to all banks and bankers- 
Total. ._ 



Country banks. 



KESOURCIiS. 

Loans and discounts- .. S455 

United States bonds on band 

Other stocks, bonds, and mortgages 
Due from approved redeeming ai 

agents 

Due from all other banks and banke 

National-bank notes 

Fractional currency. - -- 

Specie: 

Coin 

Gold treasury notes 

Let;al-tender notes 46, 

United States certificates of deposit 



591.S14.S60.33 



.822.94 

,022.38 
. 4595" 
.851.00 
.671.01 



.69 



. 660. 
.340. 



576. 43a. 689. 40 



23s. 641. 336. 00 
250.907.831.41 
18.836. 275.04 



799. 656, 244. 82 



294.615,591.75 
236,294.934.00 
239, 205, 463. 38 
15,299.096. II 



785.415.085. 14 



KIJSOURCHS. 

Loan:; and discounts 

Dcm:ind loans - .. . 

United States bunds on hand 
Other stocks, bonds, and morli::u:,". 
Due from approved, rcdeemiug, and 

agents 

Due from all otllcr banks and bankers. 

Exchanges for clearing house 

Nationnl-bank notes - - 

Fractional currency - 
Specie: 

Coin - 

Gold treasury iiotct, 

Legal tender notes. . 

United States ccrtiflcotcs of depolit 

Cleiiring-hou.sc loan certificates 



Tot;il 

LIAUILITIKS. 

Capital stock 

Circulating notes outstanding. 

Deposits of all kinds 

Due to all banks and bankers. 



S8o.,o67,oja.j8 



490,678,367.37 
341,583,601.00 
530,019.988.34 
130, 384, 700.08 



.482,565,656.79 



»777. 878. 193.84 
75.593.313.66 

9, 330, 600.00 

35, 157.7S8.84 

SI, 453. .S .10. 03 
49,578,307.70 
77.533.393.47 
18, 770,95a. 00 
2,343,037.38 

5,383. 729. .10 
12,072,560.00 
94,047,a".0' 

6,675,000.00 
27,376,135.59 



,332 

491,039,856.75 
34^,3SO,iAi.'"> 
539.302,333.10 

119.413. H"."' 



.492 



06,1 



6158 — 10 (To fiux' pajjo S3.) 



and 

mortgages 

leeming and reserve 



I and bankers - 
3use 



of deposit, 
iicates 



iding_ 



iikers - 



Oct. 13 
(179 banks 



^222, 351, 70. 

25, 182, 23! 

i.69S.6s<| 

4.9S9. 71J 

16, 118, 68] 
12,578,341 

17, 066, 3SJ 
4, 199,3c; 

58s. oi( 

I, 714, 6gt 
1 , 566, 24c 

28, 242, le.ii 

3, 150, 00c 
9,547.475 



348,957.62/ 



126, 172, 56 
78, 090,055 

148, 081, 974 
46, 017, 750 

398,362, 34S 



Crises Under National Banking System 

occurred between September 12 and October 13. The 
following table shows the changes in loans for the banks 
as a whole for the three groups of banks: 

[In millions.] 



Sept. 12, 1873 
Oct. 13, iS73_ 
Nov. I, 1873 . 




Reserve 
city banks. 


Banks in 
New York. 


$262.5 

247-5 
242. 2 


$199. 2 
179. I 
169. I 



Total. 



P940. 2 
882.4 
8s3-4 



The contraction of loans to October 1 3 may be taken as 
representing the extent of contraction which was due to 
and which in turn contributed to the severe financial 
strain of the crisis. The further contraction to Novem- 
ber I represented the diminishing requirements of busi- 
ness owing to trade depression." By the banks as a 
whole loans were reduced by $58,000,000 before October 
13, or slightly more than 5 per cent. This contraction 
was general, both the country banks and those in reserve 
cities showing a contraction of about 5 per cent and 
those in New York a more considerable contraction of 
10 per cent. The most severe contraction among city 
banks was in Chicago, where, doubtless owing to the de- 
cision of the banks not to issue clearing-house loan cer- 
tificates, loans were reduced from $25,300,000 on Sep- 
tember 12 to $19,000,000 on October 13, 

In this, as in other American crises, a somewhat exag- 
gerated opinion became current as to the extent to which 
the banks required borrowers to liquidate their loans. 

o During the last two week.s of October there were many newspaper re- 
ports of a more liberal loan policy being adopted by the banks. 



83 



National Monetary Commission 

Difficulty experienced in disposing of commercial paper 
through note brokers and the high rates for call loans seem 
to have been the grounds for this erroneous impression. 
Under our banking system borrowers unable to dispose of 
their paper through note brokers in times of crisis resort 
more largely to the particular banks which hold their 
accounts than is usual at other times. This shifting of 
loan relationships gives rise to an impression of wholesale 
contraction which the statistics of the total loans of the 
banks show to be unfounded. 

In the particular case of call loans also contraction is 
more apparent than real. On September 12 of the total 
loans of $199,000,000 of the New York banks, $60,800,000 
were demand loans. On October 13 these loans had 
been reduced only $4,600,000, about ']% per cent; while 
the $139,000,000 of other loans had been reduced to 
$123,000,000, nearly 12 per cent. These figures would 
seem to show that call loans are even less liquid than other 
classes of loans in an emergency, a view which, though 
wholly at variance with generally accepted banking opin- 
ion, will be borne out by our experience in later crises.'^ 
Explanation is simple. When a few banks demand the 
payment of call loans, the brokers to whom they are 
principally made secure loans elsewhere, and the banks 
calling the loans are paid. The total volume of call loans 
is not much changed. Within narrow limits it may be 
possible to reduce the aggregate of such loans by the sale 
of securities to persons able to pay for them outright. It 
is also possible to secure additional margins from customers 

a See p. 301. 
■ 84 



Crises Under National Banking System 

for whom brokers are carrying securities. But when all 
banks call their loans, they cease to be convertible to any 
considerable extent into money. Purchasers who might 
be able to pay for securities outright become frightened, 
and little or no contraction takes place, while panic and 
alarm are generally increased. The contraction of call 
loans is indeed wholly incommensurate with the com- 
motion in the stock market which characterizes our crises. 
There are only two kinds of loans which can be regarded 
as in any considerable measure liquid during an emer- 
gency. Loans made to those engaged in the final stages 
of production of commodities which are required for 
individual consumption may be reduced, as such producers 
curtail production and dispose of their supplies of the 
finished product. Such curtailment in production, how- 
ever, is likely to make it necessary for producers at the 
earlier stages to increase loans on account of inability to 
make expected sales. Holdings of foreign bills are prob- 
ably the only asset which may be liquidated without 
serious inconvenience to the country involved in the 
throes of a crisis; but this is a kind of investment which 
has not been held by our banks. After all, it should be 
remembered that the primary object of liquid assets is to 
enable particular banks to meet unusual requirements in 
ordinary times, not to provide the banks as a whole with 
money in emergencies. It is then the business of the 
banks to continue and even to increase their loans to the 
business community, and to rely upon their reserves of 
cash to meet money requirements. 



85 



National Monetary Commission 



From this point it will be of advantage to study the 
operations of the banks by groups, and attention is first 
called to the condition of the country banks as shown in 
the following table: 

RESOURCES. 
[In millions.] 



Loans 

Specie 

Legals 

Bank notes 

Due from reserve agents 

Due from other banks 

LIABILITIES 

Circulation 

Deposits 

Due to banks 



Sept. 12. 


Oct. 13. 


Nov. I. 


$Al&-0 


$4SS-0 


$442. 


2. O 


2. 


2. 


4S.O 


48,0 


49. 


8.S 


9.8 


9- 


64. 


38.0 


36. 


21.0 


17.0 


18. 



$233-0 


$235.0 


296. 


251. 


13-0 


19. 



?236.o 

239.0 

iS-o 



General deposits of the country banks between Septem- 
ber 12 and October 13 were reduced by $45,000,000, of 
which $23,000,000 are accounted for by loan contraction 
and $8,000,000 by the increase in circulation and the 
amounts due to other banks. At the same time the banks 
had actually increased their cash holdings by $3,000,000 
in the form of legal-tender notes and $1,000,000 in the 
notes of other banks. They had shifted more than the 
entire burden of supplying the demands of their depos- 
itors for cash, as far as they were met at all, upon the 
other banks. Deposits with reserve agents were reduced 
from $64,000,000 to $38,000,000, and amounts due from 
other banks had also been reduced by $4,000,000. The 
country banks can not be held guiltless of unnecessarily 



86 



Crises Under National Banking System 



strengthening themselves and causing needless strain in 
the money centers.'* On the other hand, the experience 
of previous years afforded ample evidence that the coun- 
try banks would adopt this policy, and the city banks 
should have held themselves in readiness to meet the obli- 
gations which they had incurred in becoming reserve 
agents. 

The following table shows the condition of the reserve 
city banks, not including those of New York: 

RE.SOURCES. 
[In millions.] 



Sept. 12. 1 Oct. 13. 



Loans 

Specie 

Legals 

Bank notes 

Due from reserve agents 

Due from other banks 

Clearing-house exchanges 

Clearing-house loan certificates. 



J262 

3 

36 

S 

32 

14 



P24S 

3 
31 

4 
16 
12 
17 

9 



>244 

3 

36 

5 
16 
14 



LIABILITIES. 


Circulation 


$78.0 

175- 

59.0 


$78.0 

148, 

46. 


$78. 


Deposits - - 




Due to other banks 









The reduction in deposits, amounting to $40,000,000 
($27,000,000 in the case of general deposits and $13,000,000 
in the case of bankers' deposits), was due in part to loan 
contraction of $17,000,000, to a reduction of $4,000,000 
in clearing-house exchanges, and of $2,000,000 in the 
amount due other banks, a total of $23,000,000. In cash 
and bank notes these banks suffered a loss of only 

oBut see what is said on the subject on p. 305. 
87 



National Monetary Commission 

$5,000,000, while they drew on their reserve agents in 
New York for one-half of their deposits, which fell from 
$32,000,000 to $16,000,000. In cash reserves the reserve 
city banks shghtly increased the ratio to their demand 
liabilities. Hardly more than the country banks did 
these banks rely on their own stores of cash to meet the 
emergency. There were, of course, wide differences among 
the banks of the different cities as to the extent to which 
they used their own reserves and reduced deposits in New 
York. The most serious offender was Chicago, the banks 
of which positively increased their cash and bank-note 
holdings from $5,700,000 to $6,300,000 and reduced their 
New York balances from $3,500,000 to $1,600,000. 

From the preceding tables the extent to which the 
New York banks alone were required to meet the emer- 
gency has been evident enough, but it will be even more 
clearly seen from the following statement of the condition 
of the New York banks : 



RESOURCES. 
[In millions.] 



Loans 

Specie 

Legals 

Bank notes 

Due from other banks 

Clearing-house exchanges 

Clearing-house loan certificates. 



Sept. 12. 


Oct. 13. 


Nov. I. 


$199.0 


$179.0 


$168 


14. S 


10 





II 


32-0 


6 


5 


15 


2.6 


4 





S 


18.0 


16 


6 


17. 


68.0 


41 





57- 




16 




IS- 









LIABILITIES. 


Circulation _ 


$27.0 

168. 

90.3 


$27.0 

131. 

55-4 








Due to other banks _ 


54. 2 







88 



Crises Under National Banking System 

General deposits were reduced by $37,000,000 and 
bankers' deposits by $35,000,000. Of this total of 
$72,000,000 some $27,000,000 are accounted for by 
the smaller clearing-house exchanges and $20,000,000 
by the contraction of loans. The remaining $25,000,000 
are rather more than accounted for by the loss of $4,500,000 
in specie and of some $25,000,000 in legal-tender notes. 
The reduction in general deposits may be reasonably 
supposed to be explained by the loan contraction and 
the smaller clearing-house exchanges; that of bankers' 
balances was due to the shipment of currency, a con- 
clusion which is in accord with the statements of the 
clearing-house loan committee regarding the matter,'* 

THE WISE POLICY OF THE NEW YORK BANKS. 

In comparison with the banks in the reserve cities, the 
New York banks responded remarkably well to the 
demands made upon them, and if comparison be made 
with the hoarding policy pursued by the New York 
banks themselves during the crises of 1893 and 1907, 
the contrast is both astonishing and disheartening. The 
explanation of the difference is simple. It was due to 
the adoption of the provision for equalizing reserves and 
to the bold and fearless fashion in which the clearing- 
house committee exercised the power which was placed 
in its hands. In consenting to the arrangement the 
conservatively managed banks exhibited a praiseworthy 
willingness to act for the common good, inasmuch as 
the demands for money were almost wholly upon the 

oSee p. 93. 



89 



National M o n e,t ar y Commission 

banks which had accumulated bankers' deposits by 
the offer of interest, and which were at the same time the 
greatest lenders on the stock exchange. The clearing- 
house committee determined to meet the obligation of 
a few of their members to the banks of the country, and 
to accomplish this purpose took money from the reserves 
of the banks whose business was of a purely local character. 
From about the middle of October proposals to bring 
the arrangement to an end were urged by some of the 
banks, but the committee manfully opposed such action 
until the beginning of November, when a common policy 
was no longer necessary. During the continuance of the 
arrangement the banks were converted, to all intents 
and purposes, into a central bank, which, although without 
power to issue notes, was in other respects more powerful 
than a European central bank, because it included virtually 
all the banking power of the city. 

The situation which confronted the New York banks 
at the beginning of the crisis and the methods of handling 
it are clearl)^ set forth in the report of a special committee 
of the clearing house which was appointed during the 
crisis to consider reforms in banking methods. It is 
hardly too much to say that this report is the ablest 
document which has ever appeared in the course of our 
banking history. It was largely, if not wholly, the work 
of the chairman of the committee, George S. Coe, who 
for more than forty years was a leading figure in the 
financial world of New York. He is said to have devised 
the clearing-house loan certificate, and he took a leading 
part in the formation of the banking syndicate which 



90 



Crises Under National Banking System 

took successive blocks of government bonds in the latter 
part of 1861. The report is so important, both in its 
narrative of certain aspects of the crisis and on account 
of the reforms suggested, that it has seemed proper to 
insert it in the text rather than to relegate it to an appendix. 

New York Clearing-House Report, November ii, 1873. 

The committee appointed by the New York Clearing-House Associa- 
tion " to carefully consider and report what reforms are required in the 
practical operations of banks with each other and with the public to 
increase the security of their business," respectfully reports: 

That in order to reach the object sought by the resolution it is necessary 
briefly to review the condition and practical working of the banking system 
in this city before the commencement of the late panic. 

Banks are the natural depositories of the current capital of the nation, 
passing into and out of active industry and commerce. The balances 
held by them are for the time specially reserved by their owners from 
permanent investment and kept subject to immediate command. They 
constitute a main portion of the wealth of the community which is not 
yet ready to be consolidated into fixed capital or immovable forms. The 
custodians of such funds are consequently bound by the very nature of 
their trust to preserve them in their integrity and to apply them only in 
such ways as will prevent them from falling into inactivity, and also to 
hold such proportion in ready cash in hand as long experience has proved 
to be necessary to meet immediate demands in every possible emergency. 
And it may be confidently affirmed that a bank or banker who faithfully 
meets all these obligations renders a full equivalent for any benefits which 
can be honorably derived from the custody of such a trust. 

No institution can, in the long run, purchase deposits of money payable 
on demand of the owners and at the same time secure to itself a just and 
proper compensation for the business without violating some of the condi- 
tions indispensable to the public safety. It must either use them in ways 
that are illegitimate and perilous or use them in excess. This has been 
abundantly proved by innumerable instances in years past, and the 
practice of paying interest for such deposits was unanimously condemned 
by the bank officers in 1857 as one of the principal causes of the panic 
at that period, for the reasons given in a printed report, of which a copy 
is annexed hereto, and to which, with the consequent resolutions of the 
associated banks then adopted, your committee most respectfully invite 
attention. 

The creation of many new institutions, since the late civil war began, 
which have considered it expedient to purchase public favor, and thus 
divert to themselves business from established channels, has revived the 

6158—10 7 91 



National M o n et ar y Commission 

custom of paying interest upon deposits, and has also led some of the older 
banks, in self-defense, to yield more or less to the pressure in the same 
direction, while it has induced others to adopt newer methods of obtaining 
patronage equally pernicious. 

And thus a sharp and degrading competition has not only prevailed 
among banks in this city, but has been excited, as a necessary consequence, 
in other places, where the far-reaching enterprise of some of our associates 
has led them in pursuit of business, not only from institutions, but from 
all classes of society. Banks throughout the country have been aroused 
to enlist in the same destructive practices toward each other and in defense 
of their various localities. A premium has been unnecessarily given for 
business which, left to itself, would fall without cost into its natural chan- 
nels and adjust itself to such localities as the convenience of the people 
and the best interests of the country require. 

Without such rivalry the resources of the nation would be so diffused 
among the banks as to give increased financial strength and stability 
to every part, and not only remove a great cause of irritation, but add to 
the comfort, efficiency, and profit of all. 

The evil results of paying interest upon current deposits, avowed when 
the internal commerce of the nation was conducted upon a specie basis, 
are greatly aggravated when it is carried on by an irredeemable currency, 
which has a fixed and invariable volume, and which flows to and from the 
commercial center with the changes of the seasons. Such a currency is 
superabundant in summer, and instead of being then naturally absorbed 
and diminished by redemption, it accumulates in banks, which can not 
keep it idle without loss of the interest paid to its owners. Legitimate 
commerce does not then demand it. It is still subject to instant call. 
There is consequently no resource but to loan it in Wall street upon stocks 
and bonds, in doing which so much of the nation's movable capital passes 
for the time into fixed and immovable forms of investment and its essential 
character is instantly changed. Loans are made with facility upon securi- 
ties which have no strictly commercial quality, new and unnecessary 
enterprises are encouraged, wild speculations are stimulated, and the 
thoughtless and unwary are betrayed into ruinous .operations. The 
autumnal demand finds the resources of the nation unnaturally diverted 
from their legitimate channels, and they can only be turned back with 
difficulty and public embarrassment. Such has been our well-known 
experience year after year. Interest upon money has, as a consequence, 
fluctuated widely from 3 and 4 per cent per annum in summer to 15 and 
20 per cent in the fall and winter upon commercial paper, and upon stocks 
at times to one-half and even i per cent a day. Vicissitudes like these 
are utterly destructive to all legitimate commerce, and institutions whose 
operations tend to such results are enemies to the public welfare. 

Deposits v/hich are derived from strictly commercial operations can not 
fluctuate so widely from time to time as to produce disturbance in the 



92 



Crises Under National Banking System 

community; and banks which confine their business to them as they 
naturally arise are always reliable and regular in their treatment of their 
dealers and can be conducted with ease and comfort to their managers 
and safety to the public. On the contrary, deposits which are purchased 
by payment of interest or otherwise, and which must, therefore, of neces- 
sity be largely loaned "on demand," are the cause of continual agitation 
and solicitude to those who hold them in charge. They are certain to be 
withdrawn at the season of the year and at the moment most inconvenient 
to the banks and to their dealers. This fact is best illustrated by the 
following figures: 

The average deposits of the 60 clearing-house banks for ten 

weeks from July 5 to September 6 were $232, 228, 000 

The lowest amount reached since the panic was i43, 1 70, 000 

Showing a total reduction of 89, 058, 000 

Of the above amount during the ten weeks, 

1 2 interest-paying banks held $111,585, 000 

The lowest total reached by them since the 

panic 52, 669, 000 

Showing a loss in 12 banks of 58, 916, 000 

In the other 48 banks 30, 142, 000 

and were it not for the fact that several of the 48 banks are more or less 
involved in the same practice, this disparity would be still more apparent. 
When the late panic commenced, the sixty banks composing the New 
York clearing house were indebted for about $200,000,000 of deposits. 
Of this amount three institutions (paying interest to their country deposi- 
tors) owed about $50,000,000, and including these, 12 banks of similar 
character owed obout $100,000,000; that is to say, 12 institutions held 
one-half of the aggregate deposits, and the other 48, their associates, the 
other half. The proportionate reserve of legal-tender notes in the asso- 
ciated banks was also greatly in favor of the latter number, for the obvious 
reason, that banks which pay interest upon money can least bear to have 
any amount of it idle. The active demand first came, as it usually comes, 
for that portion of deposits due to country banks, who, in addition to their 
annual necessities, had been disturbed by failures of several city bankers, 
holding large balances of money due to the interior. These deposits were 
to a great extent loaned upon stocks and bonds in Wall street, payable 
"on call," with the confident belief that they were there earning more than 
the interest paid for securing them, and were available as promised. But, 
from the very nature of the case, the rapid withdrawal of deposits from 
the banks made the "call" from every direction simultaneous, and closed 
every resource from which the "street" derived its power to respond. 
Borrowers upon stocks were deprived both of their facilities of borrowing 



93 



National Monetary Commission 

and of all power to sell their securities. The necessary result occurred. 
Banks which found themselves in this dilemma had no alternative but to 
ask the assistance of their associates, and the conflagration was so rapid 
and violent that every consideration of fraternal sympathy, self-preserva- 
tion, and public safety compelled a general and earnest cooperation; and 
the majority, who had for long years conducted their business upon sound 
principles, and who had patiently submitted to the loss of valuable accounts, 
drawn from them by their associates, by practices against which they had 
continually protested, instantly responded to the call by placing their 
resources at command of those who had done so much toward producing 
the calamity; making common cause, the weak with the strong, to avert 
a universal catastrophe. 

An expedient was found by which the stronger banks placed themselves 
under the unequal burden and equalized the pressure by gathering in their 
resources and placing them at the disposal of the weaker, who were thus 
furnished with means to meet the demands of their depositors and to save 
themselves from public exposure and their dealers in city and country 
from disaster and ruin. Meanwhile the public confidence in institutions 
had become so greatly impaired that the " legal- tender reserve" was 
reduced from $34,000,000, on September 20, to $5,800,000 on October 14 — 
an amount of ready money never before paid out in the same time. Inte- 
rior banks, whose ready means in hand had always been merely nominal, 
but whose resources consisted chiefly of credits upon the books of interest- 
paying banks in the principal cities, were under the necessity of calling 
back their deposits in a medium never before required, and to these the 
associated banks were asked to respond, as well as to the demands of 
timid dealers at home. 

Your committee take this occasion to congratulate the associated banks 
upon the liberal and excellent spirit in which this crisis has been met, and 
upon the happy escape from a most imminent danger which threatened 
them, and with them the country at large. It is not too much to say that, 
had it been less boldly, promptly, or unanimously encountered, the results 
must have been more disastrous and widespread than any that have 
occurred during the present generation. 

While the banks have intelligently recognized the errors of their associ- 
ates, by which the late financial complications were aggravated and the 
community imperiled, there has been no disposition whatever to deal in 
harsh reproaches. On the contrary, the magnitude of the trust is deeply 
felt, and the utmost good feeling prevails; an earnest desire and a unani- 
mous determination are expressed on every side to reform existing abuses 
and to reorganize the clearing house upon a basis of mutual support and 
uniformity of business. 

Late experience has again demonstrated the fact that the banks in the 
association are necessarily dependent one upon the other in times of peril, 



94 



Crises Under National Banking System 

as well as in the trusts which the large operations of the clearing house 
daily impose, and that the entire body inevitably suffers from the errors 
and indiscretions of a single member. No institution, therefore, has a 
moral right to conduct its affairs with the public in defiance of the general 
conviction of its associates, or to introduce private terms of dealing with its 
customers which are in conflict with the best interests of all. Bank officers 
have no right to be sharp personal competitors for public patronage, nor 
merely laborers for dividends on behalf of a limited constituency. They are 
in a most important sense trustees for the whole community, and public 
administrators of great interests, which forbid the least departure from 
principles which long experience has sanctified. 

With these general considerations, your committee proceed to the more 
practical question submitted to them, viz: "\Vhat reforms are required in 
the operations of banks with each other and the public to increase the 
security of their business;" and, first, and most prominent, they recom- 
mend that the banks entirely discontinue the payment of interest upon 
deposits, whether directly or indirectly. 

THE RESERVE. 

The requirement of a "legal reserve" is now engaging special public 
attention, and much impatience is expressed at the law which compels banks 
to hold a definite ratio of legal-tender notes to liabilities. The practical 
difficulty consists in attaching a rigid and inflexible rule of law to a mobile 
fund, which is held for the purpose of meeting sudden contingencies, and 
which is, therefore, in its very nature, a variable quantity. It is impossible 
clearly to prescribe by statute the circumstances or the exact periods during 
which the reserve should be increased or diminished. There seems an 
intrinsic absurdity in a law requiring that a "reserve" must be always 
kept, which was created on purpose to be used, or that a bank officer who 
draws upon his reserve, under circumstances for which it was intended, is 
false to the oath which he takes to obey the law. But the fact that a mili- 
tary commander can not be definitely instructed when he may employ his 
reserve force, is not regarded as a reason why that important portion of an 
army organization should be abandoned, or be reduced in number or 
efficiency. So long as bank debts are subject to cash payments, so long 
nmst the obligation be either imposed or assumed of keeping sufficient cash 
in hand to pay whatever portion can possibly be presented. It must 
always be remembered that in the absence of any important central institu- 
tion, such as exists in other commercial nations, the associated banks are 
the last resort in this country; in times of financial extremity, and upon their 
stability and sound conduct the national prosperity greatly depends. In 
claiming for them that in taking faithful care of the active capital of the 
nation with which they are intrusted they render a full and equitable 
compensation for its proper use, your committee point to the consequent 



95 



National Monetary Commission 

and paramount duty of the banks to hold such proportion of that fund in 
actual possession in cash as the extremest needs may demand. 

It has been suggested that the federal principle which our association has 
applied to banking, through the use of "loan certificates" in two important 
crises, might be used effectively in regular business, by keeping two sepa- 
rate accounts, viz, "cash" and "bank credit," each payable in kind, to 
avoid a "run" upon banks in times of panic; and much speculative study 
throughout the world is given to the question how the idea of "clearing," 
as used through banks, may be indefinitely extended to effect the smaller 
exchanges of the community, so as to dispense in a great measure with large 
reserves of ready money. But in the present condition of economic 
science, and especially in this important exigency, your committee recom- 
mend that we accept the teachings of practical experience, and pursue the 
well-beaten track which trade and commerce universally recognize. 

Experience of older commercial nations has shown that the volume of 
"reserve" should be in the proportion of one-fourth to one-third the direct 
liabilities of a bank, and whenever it is there found receding from this 
amount restrictive measures are taken to replenish it. Our own associa- 
tion in 1857 established a minimum ratio of 20 per cent in coin, which was 
for the time carefully observed, and again in i860 increased this minimum 
to 25 per cent. The present abnormal condition of the currency increases 
the difficulty inherent in this subject. The law permits the reserve to 
consist of coin and legal-tender notes, and at the same time compels banks 
to receive as money the notes of national banks, which in legal payments 
are not money; so that for practical uses as "reserve," we are troubled by 
a species of money which is above, and by another which is below, the 
standard quality. And it affords a striking commentary upon our present 
anomalous condition that the money of the world, which is now freely 
coming into the country from legitimate commerce, can not be absorbed 
into our banking system, but is necessarily repelled as a cause of serious 
embarrassment. The opinion that has largely prevailed that because the 
business of this country is now conducted upon a basis of irredeemable 
paper, that therefore there can be no suspension of payments, has been 
most effectually dispelled, and the contrary is established; that a currency, 
from its nature, limited in volume, is subject to sudden and special dangers, 
and therefore requires special protection. Recent experience has shown 
how rapidly $34,000,000 may be withdrawn from our associated institu- 
tions, and for practical uses how inadequate is the reserve held by country 
banks. That reserve, as fixed by law, is 15 per cent of liabilities, and three- 
fifths of it may consist of deposits in banks in the larger cities, who may 
subdivide it by placing one-half their own reserves in banks in the city of 
New York, where again it is subject to a further reduction, from the fact 
that these last are only required to hold 25 per cent of their own liabilities, 
of which these deposits form part. The aggregate held by all the national 



96 



Crises Under National Banking System 

banks of the United States does not finally much exceed lo per cent of their 
direct liabilities, without reference to the large amount of debt which is 
otherwise dependent upon the same reserves. When we consider that a 
portion of this final reserve may consist of coin, which, under present cir- 
cumstances, has no practical power in an extremity, and a further fact that 
the interest-paying banks, which have always held the larger part of those 
reserves, have been forced by their position continually to disregard the 
law, it is manifest that the requirement, in its real operation, has not 
worked against the public welfare, or against the true interests of the banks 
themselves. 

The abandonment of the practice of paying interest upon deposits will 
remove a great inducement to divide these reserves between cash in hand 
and deposits in cities, and make the banks throughout the country what 
they should always be, financial outposts to strengthen the general situation. 
The associated banks of New York, the ultimate resource in financial 
emergencies, are deprived by usury laws of the power, which is so effec- 
tively used by the principal banks in Europe, of protecting or augmenting 
their resources by adjusting the rate of interest to the necessities of the 
occasion — a power which, if practicable. Congress might safely confer upon 
the clearing-house committee, in consultation with the Secretary of the 
Treasury, with great advantage to the country; as also the power of 
deciding when the time or the emergency has arisen in which the public 
interest recjuires a relaxation of a rigid legal requirement in respect to the 
reserve to be held by banks in New York City. 

If the legal or financial necessity exists to maintain a certain reserve, it is 
manifestly the duty of every institution to carry its just proportion, and no 
bank, whether incorporated under national or state law, can honorably 
evade its full share of this burden. 

Your committee therefore recommend that all the associated banks, 
while they strictly follow the requirements of the national currency act, by 
keeping on hand, either in coin or legal-tender notes, an amount not less 
than 25 per cent of their total liabilities to the public, be required always to 
hold at least 15 per cent in legal-tender notes, subject only to such 
modifications as the clearing-house committee may, from time to time, 
unanimously determine. 

A suggestion has been made, which your committee consider worthy of 
notice, because it has heretofore proved an important restriction to exces- 
sive expansion, and because it may assist in preventing many of the evils 
referred to, that no institution be allow^ed to loan more than two and a half 
times its capital and surplus. 

CERTIFICATION OF CHECKS. 

The practice of certifying checks upon banks as "good" has proved a 
great public convenience, and has for that reason grown into extensive use. 



97 



National M on et ar y Commission 

Your committee approach its consideration with some embarrassment. 
The custom originated in the natural inquiry of bank tellers respecting the 
standing and credit of their dealers, and for many years it had little signifi- 
cance, otherwise than as giving clerical information. Checks so marked 
were not regarded as binding upon institutions in the nature of an official 
acceptance, and were, therefore, not entered upon their books. It was only 
since about the year 1850 that a new and influential institution deemed it 
expedient to define the character of an act then vague and uncertain, by 
charging such checks to the accounts of their drawers; since when they 
have been legally regarded as formal obligations, and have become the 
medium of the most important transactions. If such writing certified to a 
real fact, that the bank actually had in possession, and due from it to the 
drawer of the check, the stated sum which it thus agreed to transfer to 
another party, no possible injury, but great good, would ensue. But when 
a bank binds itself to transfer what it has not, but only expects to have, it 
assumes for its dealers, without reason, all the contingencies incident to 
human transactions, and places its shareholders under perils which they 
never intended to assume. 

The power of certifying checks is necessarily intrusted to clerks or subor- 
dinate officers, who are employed to perform the ordinary and more 
mechanical duties of the bank, and who are supposed to be strictly limited 
in giving to every dealer only what has before been received from him. 
And the power of bestowing credit is reserved for abler and more experi- 
enced men, themselves personally identified with the interests they admin- 
ister, who gravely deliberate upon every transaction, and decide with the 
light of their united wisdom. But the practice of certifying uncovered 
checks, as pursued in some institutions, entirely reverses this established 
order, and while the responsible council is carefully deliberating over 
smaller credits, a noncommissioned officer is freely bestowing them in 
larger volumes, without security, upon comparatively irresponsible men. 
So extensively has this practice been pursued by several institutions that 
the amount of such checks, which have passed daily through the clearing 
house, has reached in some instances to twice and three times, and in one or 
two, to four and five times their capital stock, and this through long periods 
of time. 

Every bank in the association is directly involved in the risks attending 
this practice. It multiplies excessively the sums which such institutions 
pass through the clearing house, and the consequent balances of the ex- 
changes with their associates, which the capital of such banks can never 
adequately guarantee. 

The most striking commentary upon the danger of this practice was 
afforded during the late panic by the dealer of a bank who had largely 
received such favors and who, seeing by its application to others that 
his own checks were in peril, declined, under advice of counsel, to cover 



98 



Crises Under National Banking System 

them by a deposit until otherwise assured that the bank could respond 
to these very obligations. 

No sufficient reason, in the opinion of your committee, can be given 
why a corporation should place itself without compensation and special 
security between two parties dealing with each other and become the 
guarantor of either in transactions entirely personal to themselves simply 
because one or the other is a depositor in the institution. We have 
already stated that the safe custody of money payable "on demand" is 
full compensation for its legitimate use, and the risks attending such a 
business are all that properly appertain to the profession of a banker. 
And if the rule be invariably observed of certifying checks only when the 
drawer has the full amount at his credit in the bank no one can be injured 
or offended when he is treated in all respects like every other of his fellow 
dealers. The restriction suggested will work favorably to every interest — 
to the banks, their shareholders, and their associates — by diminishing the 
risks now so widely incurred, and it also conforms to and confirms the law 
which Congress has established upon this subject in respect to national 
banks. 

Your committee therefore recommend that in no case shall a check or 
other obligation be certified by a bank unless the amount of it is first 
found regularly entered to the credit of the dealer upon the books of the 
institution 

INDIRECT EXCHANGES. 

A custom has grown up among the associated banks, and has greatly 
increased within the last few years, of engrafting upon themselves and 
thus admitting to the benefits of the clearing house, other institutions and 
individuals who, while not eligible to regular membership, participate in 
all its advantages without sharing its expenses, incurring its responsibili- 
ties, or submitting to its regulations. Over all these the association has 
no possible control. They consist of banks and corporations of various 
character and objects in this city and vicinity, many of whom attract to 
themselves deposits of active capital from the commercial community by 
extraordinary rewards and use it for purposes and enterprises which are 
illegitimate in regular banking. The associated banks thus find them- 
selves surrounded by diligent competitors in their proper business, which 
increase their risks, while they lean upon them for support. By keeping 
a satisfactory balance in bank, for which interest is frequently paid, these 
institutions avoid the necessity of any money reserve whatever and not 
only invest all the resources at their command in profitable or unprofit- 
able enterprises, but have a claim upon their patron bank for assistance 
in time of need. The banks are thus deprived of a large portion of com- 
mercial deposits that would naturally come to them and incur increased 



99 



National M o n et ar y Commission 

and indefinite risks, and the public are unconsciously placing their ready 
means where they are subject to unusual hazards. 

Any bank in the city worthy of public confidence may become a regular 
member of the Clearing-House Association, and the banks which compose 
it are bound, in duty to themselves and to the public, to withhold the spe- 
cial support of this body from any who can not submit to or safely pass 
through the necessary examination which entitles them to credit. And 
your committee can see no valid reason why banks outside this city should 
receive the benefit of the New York clearing house when they share none 
of its burdens and submit to none of its regulations. 

They therefore recommend that no bank shall receive upon deposit from 
its city dealers checks or drafts other than upon banks members of this 
association. 

RECEIVING OUT-OF-TOWN CHECKS AS CASH DEPOSITS. 

Among the various devices introduced to attract mercantile accounts 
and to secure deposits of country banks is that of receiving and crediting 
immediately as cash checks and drafts upon places outside this city, a prac- 
tice which was commenced as a special inducement by one institution, but 
which, as the natural consequence of unfair competition, has been followed 
and extended by others until it embraces points far and near throughout 
the whole country. It has been carried on with such utter disregard of 
the laws of exchange and of the time necessary to effect returns that the 
former and regular methods of making payments in and remittances to 
this city is greatly changed. Interior merchants finding that checks upon 
their own localities are readily accepted as cash in New York prefer that 
mode of payment, and they are naturally encouraged to do so by their 
banks at home, who receive the benefit; so that our own institutions are 
not only deprived of deposits which by the laws of trade naturally belong 
to them, but they are daily encumbered by a miscellaneous mass of checks, 
which occasion serious embarrassment, loss of time, great risk, clerical 
labor, and expense of collecting, entirely caused by this unnecessary diver- 
sion of business from its natural courses. Some of the interest-paying 
institutions which have by this expedient enlarged their correspondence 
with interior banks have, with them, adopted peculiar methods of facilitat- 
ing such collections, which they regard as advantageous to themselves, 
but by which they are continually extending this evil. City merchants, 
whose business is chiefly with the country, now accept such checks freely 
from their customers, because their banks will accept them from them, and 
many of the accounts which, from their amount, dealers regard as very 
valuable to their banks the latter find by experience to result in actual loss. 
Instead of being the natural depositories of country banks for the business 
of legitimate commercial exchanges in the city, such banks are thus made 



Crises Under National Banking System 

ours. The subject is the cause of continual irritation and discord between 
banks and their customers and between the banks themselves. 

Your committee, in considering this evil, can perceive no remedy but 
by its total abolition; and they therefore recommend that the clearing- 
house committee be required to establish monthly a schedule of minimum 
rates at which the associated banks shall receive on deposit checks and 
drafts upon places out of this city, and to which every bank shall be bound 
strictly to adhere. 

Having now considered the prominent evils which exist, the removal 
of which your committee consider as indispensable to the harmonious 
intercourse between banks bound together by common interests, and having 
recommended for their removal — 

1. That payment of interest upon deposits, either directly or indirectly, 
be entirely prohibited. 

2. That each bank, while it observes the requirements of the law of 
Congress respecting a reserve fund, be required to carry at all times an 
amount of legal-tender notes equal to at least 15 per cent of its liabilities 
to the public. 

3. That no bank shall certify a check as good until the full amount 
of it shall appear upon its books from a deposit, regularly entered to the 
credit of the drawer. 

4. That no check or draft shall be received by a bank upon deposit at 
par as cash, drawn otherwise than upon one of the banks composing the 
Clearing-House Association. 

5. That all checks and drafts upon places out of the city of New York 
shall only be taken at rates of discount established monthly by the clearing- 
house committee. 

They now proceed to state how the observance of these rules may be 
effectively secured. It is well known that in some of these the sentiment 
of the association has been repeatedly expressed and resolutions of reform 
have been adopted, but which have gradually fallen into neglect. 

Your committee believe that late occurrences have produced a deeper 
conviction, both in the association and in the public mind, of the inter- 
dependence of the banks upon each other, and of the wrong which any one 
member imposes upon the entire body, by unsound or irregular practices. 
They, however, recommend as an effectual security for the future: 

That the constitution of the clearing house be changed into articles 
of association, which shall be signed by the officers of every bank, or 
member, and ratified by its board of directors. And your committee 
respectfully submit for consideration the accompanying instrument, which 
has been compiled from the present constitution of the Clearing-House 
Association, with such changes and amendments as present circumstances 
have suggested. 

Your committee also recommend that the clearing-house committee 
shall procure a tablet, containing in large and very legible impressions, 



National Monetary Commission 

the rules which are to be observed by each member in dealing with the 
public, as follows: 



Ruizes 

OP THE 

ASSOCIATED BANKS 

of the city op new york 

With Their Deai^ers. 



1. No bank shall pay, or procure to be paid, interest upon 
deposits. 

2. No check shall be certified until the full amount is first 
deposited. 

3. Checks upon associated banks only received on deposit. 

4. Checks upon places out of New York City received at rates 
of discount fixed by clearing-house committee. 

5. Checks will be taken at depositor's risk and collected 
thi'ough the clearing house. 

6. Checks not good will be returned to the depositor the day 
following. 



BANKS NOT STRICTLY OBSERVING THESE RULES WILL BE EXCLUDED 
FROM THE CLEARING-HOUSE ASSOCIATION. 



These shall be appropriately framed and always kept conspicuously 
suspended in the banking room of each institution for public information. 

With these regulations the public are always informed of the terms 
upon which alone they may conduct their business uniformly with every 
bank that has the facilities and the support of the Clearing-Ho use Association. 
With these always in view, no person worthy of credit at a bank can ever ask 
a deviation from them, and no institution can retain the confidence of any 
respectable dealer after it is thus known to have compromised its integrity. 

By these important changes many of the evils which have grown up in 
the business community and which have their origin in the vicious prac- 
tices of banks will expire, the banks will resume their rightful position 
as safe and substantial supports of legitimate commerce, and their officers 
will be relieved from the anxieties which, in the present unnecessary 
competition, continually pursue them. 



Crises Under National Banking System 

All which is respectfully submitted by — 

George S. Coe, President American Exchange National Bank. 
W. L. Jenkins, President Bank of America. 
J. M. Morrison, President Manhattan Bank. 
Moses Taylor, President National City Bank. 
Committee :< F. D. Tappen, President Gallatin National Bank. 

John E. Williams, President Metropolitan National Bank. 
J. L. Everett, Cashier National Broadway Bank. 
Robert Buck, Cashier Pacific Bank. 
John Q. Jones, President Chemical National Bank. 

NO CHANGE IN BANKING METHODS. 

In emphasizing the inadequacy of the reserves of the 
banks this report was in accord with the best opinion of 
the time. Comparatively Uttle reference was made to the 
currency system as a cause of trouble, or to its modifica- 
tion as a possible remedy. It seems to have been felt that 
the banking system as it was was essentially workable if 
the banks were prepared to conduct their affairs in a con- 
servative way. It is also significant that this committee 
did not seek to shift the responsibility upon the banks 
outside New York, as has been attempted in some explana- 
tions of later crises. We have seen that the country banks 
and those of the reserve cities might have shown more 
moderation in their withdrawals from New York. Doubt- 
less the framer of the report perceived that no other course 
could be expected, since united action is out of the ques- 
tion among hundreds of banks widely separated from each 
other both by distance and circumstances. The report 
clearly recognized that the New York banks are the center 
of our banking system, and that the obligation rests upon 
them to be constantly in position to meet emergencies. 
However important the results which may be expected 



103 



Nat to n a I M on et ar y Commission 

from changes in our system of note issue, it may be sug- 
gested that this remedy has been given too exclusive at- 
tention in recent years. The older view of 1873, that our 
reserve system is unsatisfactory, may well receive careful 
consideration. 

The report of the clearing-house committee seems to 
have been received with general approval, both by bank- 
ers and by the public,^ but it led to no immediate change 
in banking methods. It was considered at a meeting of 
the banks on Thursday, November 21, and the adoption 
of its principal recommendation, that interest on deposits 
be prohibited, was favored by about three-fourths of the 
banks. It was felt, however, that a unanimous agreement 
was necessary to secure its effective adoption. At a sub- 
sequent meeting, on November 28, the committee was dis- 
charged at its own request, and a second committee was 
appointed representing views opposed to those advocated 
in the report. This action was rightly assumed to mean 
the indefinite postponement of the question, and in fact 
no report was ever presented by the second committee. 

Of the various reforms urged in the report all except that 
regarding interest upon deposits have been embodied more 
or less completely in general banking practice. A specific 
penalty for the overcertification of checks in the national 
banking law of 1882 did something to check that danger- 
ous practice ; the organization of the stock exchange clear- 
ing house in 1892 did more; and for many years over- 
certification has ceased to be a serious menace to the credit 
structure. The recommendation of the committee that 

^Commercial and Financial Chronicle, November 22, 1873, p. 677. 

104 



Crises Under National Banking System^ 

collection charges be imposed upon the checks and drafts 
of out-of-town institutions was adopted in 1899 — a pro- 
posal unlike the others, in that it was likely to be a source 
of profit to the banks. The matter of clearing for insti- 
tutions not members of the clearing house was taken up 
in 1902 in the case of the trust companies. But so far 
as the banks were concerned, no change in methods fol- 
lowed directly as a result of the experience gained during 
the crisis of 1873. 

I^EGISLATION AFTER THE CRISIS. 

Both the Secretary of the Treasury and the Comptroller 
of the Currency in their reports for 1873 commented ad- 
versely upon the practice of paying interest upon depos- 
its and upon the insufficiency of the reserves of the banks.'* 
The long session of Congress which followed the crisis was 
largely devoted to banking and currency problems, but 
with results on the banking side which were of slight prac- 
tical importance. The redemption system through re- 
serve agents in the money centers had not even served to 
remove from circulation notes which were no longer fit for 
use. Redemption at Washington by means of a 5 per 
cent fund deposited with the Treasury therefore met with 
general favor. In connection with this change it was also 
agreed without much opposition that the banks should 
be relieved from the requirement of holding reserves 
against their circulation. This change in itself, however, 
would have reduced the total reserves of the banks, and 
after the recent experience of the crisis no one was pre- 

oSee Appendix, Notes A and B, pp. 321 and 332. 



105 



fN ational Monetary Commission 

pared to contend that the reserves were too large. It was 
therefore proposed that the banks be required to hold the 
same proportion of reserve as formerly against deposits, 
but that it should be held entirely in their own vaults. By 
this change the required cash reserve of all the banks 
except those in New York would have been increased con- 
siderably more than the amount set free by the removal of 
the requirement of a reserve against circulation. As a 
slight concession to the banks it was also provided that 
the 5 per cent fund should be counted as a part of the 
required reserve. These purely banking provisions were 
accepted without much discussion both in the House, in 
which the bill originated, and also in the Senate. In both 
branches attention was almost wholly concentrated upon 
those provisions of the bill which related to the amount of 
bank notes and of greenbacks which should be issued. 
The House bill was an inflation measure, pure and simple. 
It restored the limit of $400,000,000 for the greenbacks, 
the limit which in a separate measure was vetoed by Presi- 
dent Grant. It also provided for "free banking," as it 
was then generally designated; that is, it removed the 
limit upon the total amount of circulation which the banks 
might issue." In the Senate the bill was radically modified. 
The issue of greenbacks was fixed at $382,000,000, the 
amount then in circulation; and in connection with the 
provision for free banking the requirement was added 
that greenbacks should be retired automatically to the 

f^See Congressional Record, 1873-74, p. 1007, for the bill as reported 
to the House by the Committee on Banking; and p. 3023 for its form as 
passed by the House. 



106 



Crises Under National Banking System 

amount of 25 per cent of any future increase in bank notes." 
In conference the provision requiring the banks to hold 
their reserves entirely in their own vaults was sacrificed 
in order to conciliate the opponents of contraction; but 
the proportion of greenbacks to be retired was increased 
to 3 7 K per cent. ^ This conference report was not accepted 
by the House, and a second conference was ordered. It 
was apparent that no measure looking toward resumption 
through the gradual retirement of a portion of the green- 
backs could be passed. But, apparently in order to show 
some results for their months of effort, the second confer- 
ence committee brought in a report in which free banking 
was given up and in which the only provision regarding 
greenbacks was to fix their amount at $382,000,000. The 
only change affecting circulation was to increase the amount 
to be withdrawn from banks issuing more than their 
proper quota from $25,000,000 to $55,000,000. The pro- 
vision requiring the reserves of the banks against deposits 
to be held in their own vaults was not restored.'' In this 
form the bill was passed and became law on June 10, 1874. 
Whether the provision requiring banks to hold their entire 
reserve was desirable may be open to question; but it 
has seemed advisable to place on record the peculiar set 
of circumstances which brought about a reduction in 
the- reserves required by the banks so shortly after their 
inadequacy had been made evident by the crisis of 1873. 

^vSee Congressional Record, 1873-74, P- 3835. The Finance Commit- 
tee proposed a retirement of 50 per cent, but an amendment was passed 
reducing this to 25 per cent (p. 3806.) 

b Congressional Record, pp. 4852-4853. 

c See Congressional Record, p. 5310. 

6158 — 10 8 107 



Chapter II. 

THE PANIC OF MAY, 1884. 

It will not be necessary to devote much space to the 
panic of 1884, inasmuch as the financial disturbance was 
wholly confined to New York, and in its banking aspects 
was of an unusually simple and definite nature. The 
events which preceded the panic were quite unlike those 
which preceded the crisis of 1873, or indeed crises in gen- 
eral. A period of economic activity began in 1879 and 
culminated in 1-882. During much of 1883 and the early 
part of 1884 there was a slow but general decline in most 
branches of trade, marked by some curtailment in produc- 
tion, and an increase in the number of failures, including 
a number of railroad receiverships; but more strikingly 
by a fall in prices of commodities and securities. The 
price of steel rails, for example, dropped from $71 at the 
beginning of 1880 to $35 at the close of 1883. The price 
of standard railway stocks in 1883 dechned from 10 to 20 
per cent. But the apparent strength of the banks was not 
weakened by these unfavorable business conditions. The 
expansion of loans which had been rapid from the begin- 
ning of 1879 continued, but sji sl much less rapid rate. 
In cash reserves the banks, especially those in New York, 
improved their condition, and the crop-moving require- 
ments of 1883 were met with little or none of the usual 
advance in rates for loans. 

The strength of the banks in cash reserves, however, 
was due to an artificial cause — the monthly addition of 
two million silver dollars under the provisions of the 



108 



Crises Under National Banking System 

Bland- Allison Act. This increment was hardly observed 
while business was active, though it doubtless prevented 
the country from retaining so large a proportion of gold in 
circulation as would otherwise have been the case. But 
when business became depressed, the effects of the silver 
issues became more marked. The outflow of gold being off- 
set by the silver, the banks did not experience that reduc- 
tion in reserves which would have led to an advance in the 
rates for loans in the money centers. Moreover, the silver 
issues were at least a contributing cause of the distrust of 
American securities in Europe which led to their return 
to this country in considerable quantities for some months 
before the panic. 

To these sales were attributed the enormous exports 
of gold in March and April, 1884, which amounted to 
nearly $30,000,000. Notwithstanding this loss from gold 
exports, it was not until the beginning of May that the 
reserves of the New York banks were reduced to a point 
below that at the same time in the previous year. The 
statement for May 3 showed a surplus reserve of only 
$806,000 compared with $1,604,000 on May 5, 1883. 
Money was, however, flowing into the banks from the 
country, and it was thought that the loss from gold 
exports was nearly at an end. There had been no appre- 
ciable advance in rates for loans or contraction in their 
volume during the winter and early spring. The con- 
tinued fall in security values, therefore, must be ascribed 
to other than banking causes. 

At length the strain of successive breaks in prices on 
the stock exchange brought about the downfall of a num- 



109 



National Monetary Commission 

ber of speculators whose plans might have proved suc- 
cessful if general conditions had been such as to lead to a 
rise in security values. Within little more than a week 
an astonishing series of instances of fraud and defalca- 
tion, unexampled in our history, were brought to light. 
On Thursday, May 8, the failure of the brokerage firm 
of Grant & Ward was announced — a firm better known 
for its personnel than for the scope of its business opera- 
tions with the public. The failure was unusually dis- 
astrous, the firm having assets of less than $700,000 
against liabilities of more than $16,000,000, and was 
highly discreditable to all concerned except the senior 
partner. This failure involved the Marine National 
Bank, whose president was a partner in Grant & Ward. 
The direct cause of failure of the bank was the illegal 
certification of a check for $750,000 for the above-named 
firm. The bank was of secondary importance, however, 
having a capital of $400,000 and deposits of about 
$5,000,000. It had little or no business as a reserve 
agent, since its bankers' deposits amounted to less than 
$400,000. In liquidation, its creditors ultimately re- 
ceived 83.465 per cent of their claims. This failure, 
together with various unfavorable influences of a more 
general nature, caused a considerable further decline in 
the stock market. The banks, however, were not affected, 
and the rates for the various classes of loans were ad- 
vanced but slightly, those for call loans being from 3 to 
4 per cent, for time loans from 4 to ^}4 per cent, and 5 to 
5^ per cent on commercial paper. The following week 
opened with rumors of impending failures, which shortly 
became realities. On Wednesday, May 13, it became 



Crises Under National Banking System 

known that the president of the Second National Bank 
had stolen over $3,000,000 of securities from its vaults, 
and a little later the suspension of the Metropolitan 
Bank was also announced.'^ As in the case of the crisis 
of 1873, the narrative of the events at the height of the 
panic is taken from the Commercial and Financial 
Chronicle : 

THE MONEY MARKET AND FINANCIAL SITUATION. 

Financial circles have passed through an excited week, marked by many 
disasters and full of disturbing features. The failure last week of the 
Marine Bank and of Grant & Ward, together with the developments to 
which this gave rise, created serious distrust, which was deepened when it 
was announced Saturday afternoon that the Northwestern Car Company, 
in which Senator Sabin, of Minnesota, was the controlling spirit, had been 
placed in the hands of a receiver. Consequently, an uneasy feeling pre- 
vailed on our stock exchange at the opening of business on Monday, and 
the fear was freely expressed that other institutions and firms would be 
found to be in an equally precarious condition. Prices reflected this fear 
in a pretty general decline through the day. The uneasiness increased 
rather than diminished during Tuesday, and when it appeared on Wednes- 
day morning that a defalcation of three millions had been detected in the 
Second National Bank, confidence entirely disappeared. It was apparent 
then — even before the opening of the exchange — that only very little more 
was needed to precipitate a panic and a wholesale destruction of values. 
The final shock came in the failure of several brokerage and banking firms 
and in the suspension of the Metropolitan National Bank. Then the 
wildest kind of a panic, raged, and securities were thrown overboard 
regardless of price. 

To add further to the discomfiture of dealers, money became exceedingly 
stringent, and at one time commanded as much as 4 per cent for 24 hours' 
use. This caused a further sacrifice of stocks, since few could afford to pay 
the high rate asked. The exorbitant charge was, of course, the direct 
result of the distrust prevailing, since there was no actual scarcity. There 
was no improvement until it was understood in the afternoon that the 
banks had taken action similar to that of 1873, and that no further bank 
suspensions were therefore likely. At the close of the business on that day 
the disasters included Metropolitan Bank, Atlantic State Bank (Brooklyn), 
Hotchkiss, Burnham & Co., Hatch & Foote, Nelson Robinson & Co., O. M. 
Bogart & Co., Donnell, Lawson & Simpson, Goffe & Randle, J. C. Williams. 

o See Appendix, Note C, pp. 345-350, for an account of the causes of the 
difficulties of these New York banks taken from the Report of the Comp- 
troller of the Currency for 1884. 



National M on et ar y Commission 

The improvement noted at the close on Wednesday made headway on 
Thursday, when it appeared that the Metropolitan Bank, through the aid 
of the clearing house, would be enabled to resume at once, and that the 
Second National Bank was experiencing no difficulty whatever in meeting 
all payments, the deficit having been made good in full by the father of the 
president of the bank. The failure in the morning of A. W. Dimock & Co. 
had comparatively little effect upon the market (though it caused a fall of 
64 per cent in Bankers' and Merchants' Telegraph stock), but the unex- 
pected suspension of Messrs. Fisk & Hatch late in the afternoon was a com- 
plete setback, and again threw things into confusion. Friday morning 
the closing of the Newark Savings Institution was another unfavorable 
feature, but it was soon seen that this was connected with the suspension 
of Fisk & Hatch, and a more hopeful view of the situation prevailed. No 
further failures occurring, the market improved in tone, and late in the day 
a pretty substantial recovery took place, which was furthered by the 
relaxation in the rates for money. 

We have thus briefly reviewed each day's events, because of their great 
importance and because of the bearing they have had upon the general 
commercial and financial situation. To state briefly the causes of the 
disturbance in the market, it may be said that they were strictly due to a 
complete loss of confidence, not so much in the market prices of securities 
as in the stability and soundness of various institutions and firms. The 
difficulty of obtaining ready cash, as a result of disquietude prevailing, also 
contributed to intensify the troubles that had developed. It is to this 
latter fact, namely, the desire to realize and obtain cash, that the large 
decline on Thursday and Friday of nearly 7 per cent on United States 
Government bonds is to be attributed. There was no loss of confidence in 
the value of these, nor was there in good railroad bonds and stocks. 

One result of the phenomenal and temporary rise in the rates for money 
was to bring a vast amount of foreign capital promptly to the market. 
Some of it was sent here to buy stocks at their depressed prices, and more 
to loan on stocks or any other good securities at the high rates of interest. 
The effect of this was to completely turn the foreign exchanges which had 
been running so heavily against us for the last three months. Large 
amounts of loan bills and bankers' demand bills on London came on to the 
market, and on Thursday rates for sterling dropped i cent on the pound 
and on Friday 2 cents more. The supplies of available funds furnished by 
this means, together with relief afforded by the banks in the Clearing House 
Association adopting the same plan of issuing clearing-house certificates 
for use in the settlement of their clearings as in 1873, already alluded to, 
had the effect to overcome the pinch for money, and the result was that at 
the close of business on Friday money on call had dropped to 5 and 6 per 
cent per annum.^^ 

o Commercial and Financial Chronicle, May 16, 1884, p. 589. 



Crises Under National Banking System 

In the temporary squeeze for money, resulting from the above causes 
there was of course less' business done in other classes of loans than those 
on stocks, but the evidence that there was no loss of confidenee in values 
of other kinds of collateral nor in mercantile credit at large was shown by 
the fact that while money was loaning at 3 and even 4 per cent per day 
for use in connection with stock speculations, the rates for mercantile dis- 
counts remained nominally unchanged at 4J2 and 5 per cent per annum 
on first-class indorsed paper for two and four months, and 5^ and 6 per 
cent for single-name paper." 

It will be seen that the steps taken to allay alarm were 
immediate and effective. During the following week the 
panic entirely subsided. A good detailed account of the 
action taken by the clearing house in assisting the Metro- 
politan Bank, as well as of the use made of loan certifi- 
cates, is given in the following extracts taken from the 
annual report for 1884 of the Comptroller of the Currency, 
Henry W. Cannon: 

The suspension of the Metropolitan National Bank on May 14 caused 
great excitement. All stocks and securities called upon the New York 
Stock Exchange were greatly depreciated under the pressure to sell, and it 
was practically impossible for the banks to collect their call loans, as their 
borrowers could not obtain money by sale of their securities except at 
ruinous rates; neither could they borrow elsewhere; and it was impracti- 
cable and impolitic to throw the mass of securities held as collateral to the 
call loans of the associated banks upon the market. If it had been done, it 
is probable that a suspension of gold and currency payments by the banks 
throughout the country would have followed the general panic that would 
have ensued. In this emergency the members of the New York Clearing 
House Association, realizing that an immediate demand for deposits would 
be made by their country correspondents, called a meeting at the clearing 
house on the afternoon of May 14, and the following plan for settling 
balances at the clearing house was unanimously adopted : 

"Resolved, That, in view of the present crisis, the banks in this associa- 
tion, for the purpose of sustaining each other and the business community, 
resolve that a committee of five be appointed by the chair to receive 
from banks members of the association bills receivable and other securities 
to be approved by said committee, who shall be authorized to issue therefor 
to such depositing banks certificates of deposit bearing interest at 6 per 
cent per annum not in excess of 75 per cent of the securities or bills receiv- 
able so deposited, except in case of United States bonds, and said certificates 
shall be received in settlement of balances at the clearing house." 

« Commercial and Financial Chronicle, May 16, 1884, p. 582. 
"3 



National Monetary Commission 

After consultation with the officers and directors of the Metropohtan 
National Bank a committee of examination was appointed to visit the bank 
and to ascertain if some plan could not be arranged to permit it to open 
again for business. The greater part of the securities of the bank were 
found to be of such a character that loan certificates could safely be issued 
upon them, and in this way the Metropolitan National was enabled to 
resume business on May 15 and settle its balances at the clearing house. 
The prompt action of the members of the associated banks and the resump- 
tion of the Metropolitan National Bank greatly assisted in allaying excite- 
ment and staying the panic, and although confidence was not immediately 
restored, and although the banks in the city of New York were largely 
drawn upon by their country correspondents, reducing their reserve for a 
time below the 25 per cent limit prescribed b}' law, and although, on account 
of the great depreciation of values and the stringency of the money market 
occasioned by the want of confidence, other failures of state banks, private 
bankers, and mercantile firms occurred in New York and throughout the 
country, there was no suspension of gold and currency payments at any 
point, and the issue of loan certificates was confined to the banks of New 
York City, which were soon enabled to collect their loans and make good 
their reserves. « 

Upon learning of the defalcation at the Second National Bank on May 
14, and when it was apparent that a financial crisis was imminent in the 
city of New York, the Comptroller ordered expert and reliable examiners 
to the assistance of the national-bank examiner stationed at New York in 
order to protect the public. The examiners were instructed to exercise 
the utmost caution and vigilance, and to visit any of the national banks 
that appeared to be in trouble or where violations of law or irregularities 
were suspected. They were especially instructed to report any criminal 
irregularities or violations of section 5209. Before permitting the Second 
National Bank, whose president had misappropriated over three millions 
of its funds, to open for business, the defalcation was made good under 
the supervision of the examiner. The plan of resumption for the Metro- 
politan National Bank, by obtaining loan certificates of the New York 
Clearing House Association upon its securities, was also submitted by the 
examiner in charge of the bank to the Comptroller, the examiner remaining 
in charge until the plan was carried into effect and the bank permitted to 
resume. & 

The success which crowned the efforts of the banks in 
dealing with this crisis affords convincing evidence that 
if clearing-house loan certificates are to be issued at all, 
they should be issued at the beginning of a disturbance. 
Local runs on the banks did not become severe, because 

o Report of the Comptroller of the Currency, 1884, p. 33. b Ibid., p. 36. 

114 



Crises Under National Banking System 

announcement was made that assistance would be granted 
at the moment when the disasters which might have weak- 
ened general confidence became known to the public. It 
was also a favorable circumstance that the panic came in 
the spring rather than in the autumn. Crop-moving re- 
quirements were months away and the normal movement 
of money was in favor of New York. The danger which 
confronted the banks was therefore confined to withdraw- 
als which might be made on account of the loss of confi- 
dence. Having made arrangements which reduced that 
danger to a minimum, the banks endured calmly a mod- 
erate loss of cash from their reserves and were able to go 
through the disturbance without suspending payments. 

Looking below the surface, we shall discover in a mild 
form the same elements of weakness which caused suspen- 
sion in 1873. The Second National Bank was a purely 
local institution, having no bankers' deposits whatever. 
On the other hand, about $7,000,000, nearly two-thirds of 
the total deposits of the Metropolitan Bank, were due to 
other banks. Had the clearing house not acted with ad- 
mirable promptness in coming to its assistance there is 
little question that out-of-town banks would have become 
alarmed for their deposits, not only in this bank but for 
those in the banks generally. Even as it was, the cus- 
tomary inflow of funds from the interior, which had been 
going on for some weeks, was instantly reversed during 
the panic week. According to the returns collected from 
the banks by the Financial Chronicle regarding the move- 
ments of money to and from the interior, there was a gain 
of nearly $3,800,000 for the week ending Friday, May 9. 
In the following week it was reported that " the exchanges 

115 



National M on et ar y Commission 

at interior points have been deranged by the existing con- 
dition of affairs, St. Louis faUing to par against 90 cents 
per $1,000 premium, and Chicago being nominally 80 cents 
per $1 ,000 discount against 60 cents premium. These rates 
indicate the calling of balances from New York, due to the 
bank failures and the disturbed credit." '^ The loss of the 
banks as reported for the week ending May 16 was 
$1,107,000, and in the following week there was a further 
loss of $2,300,000. After that date, with the renewal of 
confidence, the normal movement in favor of New York 
was resumed. The actual loss of cash by the New York 
banks was, however, far greater than the amount of the 
reported withdrawals by country banks. Between May 
10 and May 24 the reserve of the banks fell from $86,000,- 
000 to $67,000,000; and although deposits were reduced 
by considerable contraction in loans, a surplus reserve of 
$4,400,000 was converted into a deficit of $6,600,000. 
The comparatively slight reserves of the New York banks, 
and hence their small resisting power, could not be disguised, 
even though they succeeded in passing through the strain 
of this panic. Had there been numerous failures among 
country banks (the failure of the Pennsylvania Bank in 
Pittsburg, owing to dishonesty, disclosed by the collapse 
of a speculative movement in oil, was the only important 
banking failure outside of New York) , or had the disasters 
in New York occurred during the crop-moving period, 
there is every probability that the banks would have 
drifted into suspension. 

Notwithstanding the liberal issue of loan certificates, 
the banks contracted their loans to a noticeable extent, 

oSee Commercial and Financial Chronicle, May 31, 1884, p. 583. 

116 



Crises Under National Banking System 



from $333,000,000 on May 10 to $313,000,000 on May 
24. That this contraction was not accompanied by 
extraordinarily high rates for loans except during the very 
height of the panic may be explained by the entrance of 
country banks into the market for commercial paper from 
which the New York banks had virtually withdrawn.*^ 

Further evidence of the strain upon New York banks 
is afforded by the two returns of the national banks to 
the Comptroller of the Currency on April 24 and June 
20. As the first of these returns was made before the 
crisis, while money was coming to New York from the 
country, and as the second was made after withdrawals 
had ceased and money had begun to be sent back to 
New York, they may be taken to represent, at least 
roughly, the changes in the amount of bankers' balances 
due to the crisis. The following table shows the prin- 
cipal items of reserves and liabilities of the New York 
national banks on the dates mentioned above: 

[In million dollars.] 



RESOURCES. 

Loans 

Due from banks 

Clearing-house loan certificates 

Clearing-house exchanges and cash items _ 
Cash reserve 



LIABILITIES. 

Individual deposits 

Due to national banks 

Due to other banks 

Clearing-house loan certificates 



April 24. June 20. 



$250 



64 
74 

231 
9S 
37 



S209 
19 

10.3 
Si 
67 

203 
71 
28 



This table shows changes which are unlike in many 
respects those which occurred in the crisis of 1873 and, 

a See Commercial and Financial Chronicle, May 31, 1884, p. 632. 

117 



National Monetary Commission 

as we shall see, unlike those in later crises. In the first 
place, it will be observed that while the reduction in 
bankers' deposits was large, amounting to $33,000,000, 
on the other side of the account the banks experienced 
a loss of cash of only $7,000,000. This seeming contra- 
diction of the view so frequently expressed in these pages 
that bankers' deposits are reduced primarily by with- 
drawals of cash requires explanation. In this particular 
instance the out-of-town banks lent largely in the New 
York market, and the credits thus secured by borrowers 
would serve to diminish bankers' deposits and increase 
individual deposits, which would then be canceled by 
the liquidation of New York bank loans. That this was 
the case is evident from the slight change in the amount 
of individual deposits, there being a reduction of only 
$28,000,000, while the diminution in loans and clearing- 
house exchanges amounted to $52,000,000. The shift- 
ing of loans from the New York banks to the out-of-town 
banks would result in large unfavorable balances for 
those banks holding large bankers' deposits, unless the 
borrowers from the country banks also happened to be 
depositors with them. The disturbance due to the 
shifting of loans would, however, be much less than when 
the country banks actually withdrew funds, since the 
unfavorable clearing-house balance could be met by the 
resort to clearing-house loan certificates. After this ex- 
planation, it will cause no surprise to find that the greater 
part of the certificates taken out, aside from those issued 
for the Metropolitan Bank, were taken out by the banks 
having large bankers' deposits. Only 20 of the 82 clearing- 



118 



Crises Under National Banking System 

house banks took out certificates, and several of the banks 
did not use them.*^ It was because the strain remained 
purely local that the use of loan certificates alone proved 
sufficient to meet the emergency. 

The experience derived from this panic directed atten- 
tion once more to plans for strengthening permanently 
the credit fabric through clearing-house action. George 
S. Coe in a notable address reaffirmed the suggestions 
made in the clearing-house report of 1873, ^^^ ^ commit- 
tee was appointed which reported favorably upon the 
proposal to prohibit interest upon deposits, the repre- 
sentative of only one bank dissenting. Both the address 
and the report of the committee will be found in the 
appendix. ^ The opposition of a few banks was, however, 
again effective, though the interest-paying banks seem to 
have agreed upon a uniform rate of 2 per cent upon 
country balances. *= 

As in the case of the crisis of 1873, the Comptroller of 
the Currency formulated a number of suggestions based 
upon the experience of the banks during the panic. 
Those portions of his report bearing on this subject will 
be found included in the appendix. The danger of over- 
certification was emphasized, and the creation of a stock- 
exchange clearing house urged. '^ Difficulties in securing 
adequate information through examination were pointed 

«See Appendix, Note C, pp. 350-353, for details, including forms and 
statistical information, regarding the issue of clearing-house certificates 
in 1884. 

& Appendix, Note D, pp. 371-386, and also Commercial and Financial 
Chronicle, May 31, 1884, pp. 632-633. 

cSee Banker's Magazine, November, 1884, p. 390. 

c^See Appendix, Note C, pp. 353-359. 

119 



National Monetary Commission 

out, and, finally, the evil effects of interest on bankers' 
deposits were indicated ; but the difficulty of securing effect- 
ive action seemed insurmountable to the Comptroller.'^ 
Finally, it may be noted that little or no reference was 
made by anyone to changes in the system of note issue. 
The discontinuance of the silver purchases was the one 
currency matter to which much attention was given. 

It remains to call attention to a precedent which was 
made, if not established, during this crisis, a precedent 
which was to have far-reaching consequences, although 
its significance was not perceived at the time or subse- 
quently. The arrangements of the clearing house, when 
clearing-house loan certificates were issued, were unlike 
in one most important respect those adopted in 1873 and 
on earlier occasions. No provision was included for the 
equalization of the reserves of the banks. Opposition to 
this measure was so widespread that it does not appear 
that it was even formally considered. The ground of 
this opposition can be readily understood. In 1873 the 
nqninterest-paying banks entered into the arrangement in 
expectation of securing a clearing-house rule against the 
practice of paying interest on deposits, but their efforts 
had resulted in failure. Some of them had employed 
their reserves for the common good most reluctantly in 
1873, and the feeling against a similar proposal in 1884 
was naturally far stronger and more general. Moreover, 
the working of the pooling agreement in 1873 had occa- 
sioned heartburnings which had not entirely disappeared 
with the lapse of time. It was believed, and doubtless 

oSee Appendix, Note C, pp. 359-370. 



Crises Under National Banking System 

with reason, that some of the banks had evaded the obli- 
gations of the pooHng agreement. It was said that some 
of the banks had encouraged special currency deposits, 
so as not to be obliged to turn money into the common 
fund. Further, as the arrangement had not included 
bank notes, banks exchanged greenbacks for notes in 
order either to increase their holdings of cash or to secure 
money for payment over the counter. Here we come 
upon an objection to the pooling arrangement which 
doubtless had much weight with the specially strong 
banks, although it was more apparent than real. In 
order to supply the pressing requirements of some banks, 
others who believed that they would have been able to 
meet all the demands of their depositors were obliged to 
restrict payments. That such an expectation would 
have proved illusory later experience affords ample 
proof. When a large number of the banks in any local- 
ity suspend, the others can not escape adopting the same 
course. ** But in 1884 it was a belief the erroneousness 
of which had not been made evident by recent experience. 
The following news items regarding the pooling arrange- 
ment in 1873 are instructive, though they go too far in 
attributing the restriction of payments to that device : 

When the question of "pooHng" the greenbacks came up, one or more of 
the banks strongest in legal tenders, especially the Chemical, demurred, and 
substantially refused to enter into what they regarded as an inequitable 
arrangement. The solemn assurance that they would be expelled from the 
association if they persisted in that position brought them to terms, and they 
will now all stand or fall together. — New York Tribune, September 26, i8j^. 

There is a very early prospect of putting an end to the " pooling" arrange- 
ment for greenbacks. Many of the old and prudently managed banks 
down, and nearly all the small banks up town, are restive under the arrange- 
ment and desire the liberty of managing their own greenbacks, as well as 
national bank notes, in their own way, and to receive and pay them out 

oSee p. 181. 



National Monetary Commission 



across their counters. Their receipts, they very properly urge, can not be 
made free, as before the suspension, so long as there is a discount on bank 
checks in Wall street, and while they have no anxiety about breaking up 
the arrangement for certifying checks payable through the clearing house, 
and settling daily balances in relief certificates * * * they do insist 
on the resumption in notes * * * across their own counters. It is 
further urged that this license need not necessarily create embarrassing 
discriminations among the different banks in the clearing house. All will 
be left to settle the order of business with their own dealers. If any of 
them are unable to send currency to their country bank correspondents 
where such correspondents have a claim upon them for notes in place of 
certified checks to pay debts in New York, they will have to buy the notes 
or sell their gold reserve for notes. Should the Gold Room persist in buying 
and selHng and setthng daily balances exclusively in certified checks, the 
gold can be sold for notes to * * * any other responsible bullion and 
bank-note broker on the street. The belief now prevails, however, that 
currency, on the resumption of currency payments in New York, will come 
from the West as rapidly as it will go to the South, and large sums of green- 
backs now withheld in New York and the East will soon return to the 
general banking employment. — New York Times, October lo, 1873. 

The banking movement is reported better from the clearing house, but 
the precise position of the Associated Banks is withheld from the public. 
The clearing house, it is rumored, has under control only $6,605,000 green- 
backs to-day, but the belief is that double this sum in greenbacks and 
national bank notes is actually held in bank, in one way or another. The 
circumstance that pains are taken by certain of the well-to-do and strong 
banks to keep down the scaling process, to the support of their less prudent 
neighbors, is only another argument in favor with doing away with the 
pooling and scaling order at the clearing house, to which we may add the 
additional and very forcible argument that bank checks have fallen to 
one-fourth to one-half per cent for currency, owing to the accession of 
greenbacks and nationals by express and the appearance of numerous and 
very considerable Treasury warrants * * * in the mails from Wash- 
ington and the West. — New York Times, October 18, 18^3. 

There is less difficulty about paying out currency when wanted for pay 
rolls at home, or remittances to the country banks near by, and while the 
majority of the clearing-house banks persist in what is known as the pooling 
and scaling process in the matter of greenbacks, these notes have been 
freely thrown upon the street, and sold for bank checks, not only by outside 
parties, receiving them by express or otherwise, but by some of the stronger 
banks themselves; the latter having vainly protested against the folly as 
well as injustice of the process referred to, to the support of the weaker 
banks, none of which would be suffered to fail, but some of which fear the 
liquidation of their deposits, in case greenback payments become the rule 
in place of the exception among the other banks. — New York Times, 
October 20, iSy^. 

122 



Crises Under National Banking System 

One of the reasons given [for dissolving the pooUng agreement] is that 
some of the banks evade the obligation. * * * Por example, * * * 
[some banks] which receive greenbacks in the ordinary course of business 
* * * instead of placing them in the "pool," enter them in their respec- 
tive books as "special deposits," sacred to the exclusive draft of the de- 
positor, when in reality they are used as the banks deem most convenient. 
Again, these latter banks secure greenbacks * * * and exchange them 
for national-bank notes, and pay these over the counter. * * * Up jq 
the present time checks for the pay rolls of manufacturers have been the 
only large sums cashed by a certain class of banks, but it is expected that 
the banks will take some action this week to effect a formal resumption 
of payments. * * * Some feeling exists on the subject of these pay- 
ments, inasmuch as a number of the banks in Western cities have resumed, 
while New York has not formally done so as yet. — New York Tribune, 
October 21, 18 j s- 

Itmaybeassumed that thequestion of general currency payments * * * 
is about to solve itself. Most of the banks are paying on all demands, 
when preferred to the certification of checks, and the difTerence against the 
checks of other banks that, from their position, decline to pay out large 
sums in currency is only one-fourth to one-eighth per cent in exchange for 
greenbacks or nationals. Some of the first-class of banks are not only help- 
ing their neighbors to greenbacks and sending currency to their country 
correspondents, but they are paying their debtor balances at the clearing 
house, as a matter of choice, in greenbacks in place of relief certificates. — 
New York Times, October 23, 1873. 

If the emergency in 1884 had been more serious or pro- 
longed the need of some arrangement for equaUzing re- 
serves when loan certificates were issued would probably 
have been made apparent. But as the banks were able 
to handle the situation successfully both in 1884 and in 
1890 with the loan certificate alone, the original comple- 
mentary device of equalization came in the course of time 
to be not only disregarded, but entirely forgotten. The 
result has been, as we shall see, to convert the clearing- 
house loan certificate into an instrument which inevitably 
and immediately leads to the suspension of payments by 
the banks. But this is a matter which can only be ex- 
plained at a later stage in this investigation. 

6158 — 10 9 123 



Chapter III. 

FINANCIAL STRINGENCY IN 1890. 

No changes in banking methods or in legislation were 
made as a consequence of the experience afforded by the 
panic in 1884. In 1887, however, the provisions of the 
national banking law "' regarding reserve cities were 
somewhat modified, but it was a change which does not 
seem to have been made so much for banking reasons as to 
satisfy the ambitious desires of the bankers and people of 
certain cities. Instead of designating the cities by name 
it was provided that cities with a minimum population of 
50,000 ^ might upon the application of three-fourths of the 
banks established in them, become reserve cities, and that 
cities with a minimum population of 200,000 might simi- 
larly become central reserve cities. 

Chicago and St. I/Ouis at once elected to become central 
reserve cities, but no other cities have followed their 
example. The number of reserve cities has slowly 
increased until at present there are 46, contrasted with the 
13 (not including Chicago and St. Louis) reserve cities 
before 1887. This change in the law did not involve any 
essential modification in the national banking system. 
The increased number of reserve cities has simply kept 
pace with the growth of population in different sections. 
As regards the two additional central reserve cities, the 

oAct of March 3, 1887. 

*> Reduced to 25,000 by the act of March 3, 1903. 

124 



Crises Under National Banking System 

immediate efifects at any rate, were much less important 
than has been generally supposed . At that time the Chicago 
and St. Louis banks controlled only 5 per cent of the total 
resources of the national banks of the country and tHeir 
bankers' deposits amounted to only $34,000,000, com- 
pared with $145,000,000 held by the New York banks. 
Moreover, the Chicago and St. Louis banks did not dis- 
continue the practice of keeping large balances in New 
York even though they could no longer be included as a 
part of their required reserves. In the case of the Chicago 
banks, for example, in March, 1887, just before they 
ceased to be reserve cities, the amount due from reserve 
agents was nearly $7,000,000, and the amount due from 
other banks was nearly $5,000,000. In the following 
return for May the amount due Chicago banks from other 
banks had increased to $10,000,000. Evidently the con- 
siderable addition to this item was due to the continuance 
of balances in New York which could no longer appear 
under the rubric " Due from reserve agents." 

In the course of time the banks of Chicago and St. Louis 
have largely increased the amount of their bankers' 
deposits and also its proportion contrasted with New York. 
In May, 1890, the New York banks owed other national 
banks $124,000,000, those of Chicago and St. Louis $35,- 
000,000. In May, 1908, these deposits of the New York 
banks had increased to $294,000,000, those of the two 
other central reserve cities to $178,000,000. The central 
position of the New York banks has not, however, been 
greatly changed in consequence of the increasing im- 
portance of the Chicago and St. Louis banks as reserve 



125 



National Monetary Commission 

agents. Their balances in New York continue to be large 
and are drawn down in every emergency.'^ In May, 1908, 
for example, the amount due to the banks of Chicago and 
St. Louis from other national banks was $79,000,000, 
while the similar item for the New York banks was but 
$44,000,000, although their total resources were then two 
and one half times as large as those of the Chicago and 
St. Louis banks. That a large portion of the amount due 
to the banks of the two western central reserve cities 
consists of balances with the New York banks is well 
known, though no figures of its exact amount are available. 
Large New York balances are necessary because New 
York remains the clearing house of the country. In this 
connection certain statistics gathered by the Comptroller 
of the Currency in 1889, 1890, and 1891 are of interest. 
From information provided by 3,329 of the 3,438 na- 
tional banks, it was found that in 1890 all but three 
drew drafts upon New York, and that the total amount 
of such drafts was 61.31 per cent of all the drafts drawn 
upon all the banks of the country. The amount drawn 
upon the Chicago banks was but 9.82 per cent of the 
total. The Chicago banks drew upon New York for 
$222,000,000, and were drawn upon in return for but 
$82,000.^ These figures show very clearly how indis- 
pensable is the maintenance of cash payments by the New 
York banks if the dislocation of the domestic exchanges 

o In recent years investments in the New York call-loan market by the 
banks of other cities have become large; they are reduced in emergencies 
to an even greater extent than balances. The effect on the New York 
banks is similar. See p. 229. 

&See Report of the Comptroller of the Currency, 1891, pp. 16-23, and 
ibid., 1892, pp. 24-31. 

126 



Crises Under National Banking System 

is to be avoided. Even if every bank were required to 
keep its entire reserve in its own vaults, though the Hke- 
lihood of suspension in New York might be diminished, 
the certainty that general suspension would follow sus- 
pension in New York would remain. 

One further matter regarding the relative position of the 
New York, Chicago, and St. Louis banks may be noticed. 
With few exceptions all our crises, panics, and periods 
of less severe monetary stringency have occurred in the 
autumn, when the western banks, through the sale of the 
cereal crops, were in a position to withdraw large sums 
of money from the East. In normal course credits from 
the sale of agricultural products will serve to meet pur- 
chases of eastern and imported manufactures, which will 
be spread over the autumn and winter months. But for 
a short period in October and November the western 
banks are in position to draw for more money than the 
course of trade will permit them to retain permanently, 
and this power they have been disposed to exercise in 
emergencies. 

In both the instances of financial strain which have 
been examined, the causes of the disturbance were pri- 
marily of domestic origin. In 1873 the unwillingness 
of Europe to take indefinite quantities of our securities 
was after all a minor factor, and in 1884 the return of 
American securities before the May panic was the result 
of developments which had taken place in this country. 
We have now to consider a crisis in which the United 
States participated, to a somewhat greater extent at 
least, as a passive sharer in a disturbance the causes of 
which were in other parts of the world. 

127 



National Monetary Commission 

It became evident in 1893 that the beginnings of much 
unsound business activity were of long standing, but in 
1890 the condition of affairs had not reached that unstable 
condition which renders a transition to depression inevi- 
table. The painful consequences of an even more unstable 
business situation would probably have been delayed as a 
result of the abundant harvests of 1889, which, as the yield 
elsewhere was below the average, made it possible for the 
United States to increase exports very materially over the 
amount in the years immediately preceding. For the 
year ending June 30, 1889, merchandise imports of $742,- 
000,000 exceeded exports by nearly $3,000,000, while in 
the following year exports of $857,000,000 exceeded im- 
ports by $68,000,000, and gold exports fell from $49,000,000 
to $4,000,000. The yield of the crops of 1890 was less 
satisfactory, but the prices at which they were marketed 
were appreciably better. It is probable that nothing 
more than the usual monetary stringency would have 
occurred in the autumn of 1890 had this country been able 
to escape from the effects of the collapse of the speculative 
movement in England which culminated in the Baring 
failure in November. Sufficient reason for this belief is 
afforded by the continuance of business activity without 
serious interruption and the speedy return to normal 
banking conditions which was reached before the end of 
the year. There was no accumulation of money in the 
banks or decline in the demand for loans such as marks a 
period of general business reaction and trade depression. 
Aside from the stock exchange and the banks of the eastern 
money centers the disturbance did not reach an acute 

stage. 4 

128 



Crises Under National Banking System 

From about the beginning of 1886 there was a steady 
increase in the volume of bank loans extending pretty 
generally throughout the country. In New York this 
upward movement was never very rapid and it did not 
continue beyond the spring of 1889. Further increase 
in that center was checked by declining cash reserves. 
During the first half of 1890 the banks were regularly 
from ten to fifteen million dollars below the reserve at the 
same time in the previous year. Explanation of this 
uncomfortable situation is simple. It was due to the 
smaller amount of bankers' deposits which provide so large 
a proportion of the resources of the New York banks. 
The amount due to the banks reached its highest point in 
February, 1889, at $145,000,000. At the same time in the 
following year it was only $132,000,000, and there was 
about the same relative difference at corresponding dates 
in other seasons of the two years. 

Declining bankers' balances in New York may be due to 
either one of two causes which are quite different in nature. 
At times out-of-town banks lend largely in New York, a 
condition which has been very common in recent years. 
In that case the amount of money in the possession of the 
New York banks is not appreciably affected. Bankers' 
deposits are reduced, but individual deposits become cor- 
respondingly greater. It may happen, however, that 
interior banks find full employment for their funds at 
home. This was the situation of affairs in 1889 and 1890, 
when active business in the West and South taxed the 
banking resources of those sections, leaving no surplus for 
deposit in New York bevond the amount which could be 



129 



National Monetary Commission 

included as a part of the required reserve. The reduction 
in bankers' deposits, therefore, tended to reduce to an 
equivalent extent the amount of money in the New York 
banks. It did not, however, tend to diminish the probable 
requirements of the interior banks for a supply of money 
for crop-moving purposes. On the contrary, such demands 
were likely to increase on account of the greater activity 
in the West and South as far as it led to an increase 
in agricultural production. 

Only one course was open to the New York banks if 
they were to maintain themselves in a position at least 
as strong as in 1887 or 1888. By reducing the average 
volume of loans by an amount several times greater than 
the loss in reserves deposits would have been canceled 
sufficiently to give them the same surplus reserve which 
they had had in previous years. The average volume of 
loans was indeed some $10,000,000 less in the first half 
of 1890 than at the same time in 1889, but this contrac- 
tion was not sufficient to offset in deposits the amount 
of the loss in reserve. Consequently the surplus reserve 
in New York was in general distinctly less than in the 
previous year. In lieu of adequate contraction the banks 
seem to have adopted the illusory policy of increasing 
the amount of their call loans relative to the total of 
their loans. In the absence of statistical evidence it 
can not be positively asserted that the amount of call 
loans was actually increased, but this is a matter of sec- 
ondary importance. It is certain that the banks were 
lending more nearly to the limit set by reserve require- 
ments and that whenever their reserve fell off even slightly 



130 



Crises Under National Banking System 

they resorted to call-loan contraction. Rates for these 
loans consequently became subject to increasingly violent 
fluctuations. Between July, 1889, and July, 1890, the 
loans of the clearing-house banks were continually in 
the neighborhood of $400,000,000. When they were a 
few million dollars above that amount call-loan rates 
were moderate; when a few million dollars below, they 
were advanced to painfully high levels. 

Notwithstanding smaller reserves and more frequent 
fluctuations in rates, the course of the securitiy markets 
during the winter and spring of 1890 was not unlike 
that in previous years. The month of May, as usual, 
found quotations at the highest level since the beginning 
of the year, though not at so high a point as in 1889, 
This was probably because of the comparative scarcity 
of loanable funds. The normal June increase in the 
reserves of the banks was accompanied by a downward 
tendency in the rates for loans, but although there were 
almost no unfavorable railway or trade developments, 
there was a distinct pause in the upward movement on 
the stock exchange. There was almost no change in the 
volume of loans during the month, and the speculative 
movement seemed to be subsiding. The cessation of the 
foreign demand for American securities rather than any 
positively unfavorable development in this country 
seems to have been the occasion of this change in specu- 
lative feeling, and before the beginning of July the sale 
of American securities by London became the controlling 
factor in the situation. For a number of years English 
capitalists and banking houses had been indulging in 



131 



National Monetary Commission 



venturesome foreign investments, especially in South 
America. During the summer of 1890 London was 
selling good securities in order to carry the load of 
investments of a less desirable description. These sales 
caused foreign exchange rates to turn persistently against 
the United States, and between the middle of June and 
the second week of August gold was exported to the 
amount of $15,250,000, equal to about one-seventh of 
the reserve of the New York banks at that time. As a 
result of this gold movement the reserves of the banks 
were somewhat less at the beginning of the crop-moving 
period in August than they had been at the end of June, 
a quite exceptional condition. 

The following table shows the changes in the condi- 
tion of the New York banks from June 28 till August 9, 
1890, and also the weekly fluctuations in call-loan rates: 

New York bank statement. 
[In millions.] 



June 28 

July S- 

12 

19 

26 

Aug. 2_ 



Loans. 


Cash. 


Net 
deposit. 


Surplus 
reserve. 


$397- I 


i5io8.o 


%AoS. S 


$6.6 


404. 6 


106. 5 


414.3 


3 


8 


403.0 


no. 3 


415.9 


6 


4 


402.3 


109. 2 


414.3 


S 


7 


400. 


108.3 


408. 9 


6 


I 


401.4 


112. 9 


415.0 


8 


9 


406. I 


I03-3 


407. 9 


I 


3 



Call-loan 
rates. 



4K-10 
2-9 
3-8 
2-6 

2j^- 6 

2 - 6 

3 -20 



On June 28, with a reserve of $108,000,000, the banks 
had a surplus reserve of $6,600,000, while on August 9 
their reserve was reduced to $103,000,000 and the surplus 
was only $1,300,000. During July the Treasury had 
paid out $4,000,000 in excess of its receipts, and the re- 

132 



Crises Under National Banking System 

ported movement of money between New York banks 
and the interior showed a net balance of nearly $4,000,000 
in favor of the metropolis. It should be added that there 
was no appreciable change in the reserves of the banks 
until the week ending August 9. This was because 
$8,500,000 of the $15,250,000 of gold exports were taken 
during the last week of July and the first week of August. 

While London sales of American securities were the 
fundamental cause of this movement, the banks might 
probably have prevented some of the outflow had they 
pursued a more conservative lending policy. Low rates 
for call loans during July and the increase in loans at the 
beginning of August facilitated the transfer of securities 
to this country. A declining stock market was prevented 
in July (indeed the quotation for some securities then 
reached the highest level of the year) with the result of 
making inevitable a vastly more serious collapse in August 
and September. Moreover, then as now it was customary 
for foreign exchange dealers to draw anticipatory bills of 
exchange to be met with cotton and grain bills later in the 
season. In the summer of 1890 such bills were not drawn 
because interest rates were higher in London than in 
New York. In this connection it is worthy of note that 
gold shipments came to an end as soon as there was an 
advance in the rates for loans in New York. 

It is indeed true that the bank statement for August 2 
showed that the banks had a considerable surplus reserve, 
but that alone was not sufficient ground for the policy 
pursued. The necessity of sending large amounts of 
money to the interior was realized, but instead of declining 



133 



National Monetary Commission 

to increase loans altogether the banks simply discrimi- 
nated in favor of call loans. The policy of the banks was 
thus described in the Chronicle for August 2 : 

Another element of uncertainty has affected our money market this 
week. The large export of gold with the prospect before us of more to 
follow disturbs all calculations. Gold exports are, of course, a material 
loss even if regarded simply as a question of the quantity of our currency 
for early fall requirements, for evidently it is no gain in exchanging 
$5,000,000 of silver certificates a month for $10,000,000 of gold. It may be 
said that the flow of gold is not likely to continue long, but in the meantime 
the loss is sufficiently large to make an impression upon the bank reserves, 
Hence it is that money on time is firmer this week (although a large amount 
of currency has been paid out by the Treasury on account of bond pur- 
chases), while on call it is easier. The most liberal lenders for from day to 
day money are the banks. As their reserves are low, as they are being 
drawn upon for the gold exports, and as they are liable to be further 
drawn upon for crop purposes, the officers prefer to keep their money 
within control, which they could not do if loaned on time. Some of our 
largest trust companies also refuse to put out their money otherwise than 
on call, but they are companies that do not disturb call money except when 
there is some material change in the market. 

As already stated, the rates for call money have "for the reasons mentioned 
been easier this week. So far as reported for bankers' balances the extremes 
have been 6 per cent and 2 per cent, the average being 4 per cent. The 
banks and trust companies have loaned at 4 per cent as the minimum, 
many, however, getting 4^^ per cent.« 

Within less than three weeks from the date of the report 
quoted above call loans were advanced to 186 per cent 
and the stock market was in a turmoil. Not a single 
failure had occurred. Nothing had happened except that 
the reserves of the New York banks had been reduced by 
entirely normal causes from $103,000,000 on August 9 to 
$95,000,000 on August 23, and the banks were below 
reserve requirements, $2,800,000. To meet this situation 
the banks were resorting to call-loan contraction, or at 
least they were attempting such contraction. Notwith- 

aThe Commercial and Financial Chronicle, August 2, 1890, p. 124. 

134 



Crises Under National Banking System 

standing the efforts made by the banks to secure the 
"money " which they fancied they had "kept within con- 
trol," they were only able to reduce their loans by $8,500,000 
during the two weeks after August 9, when they were at 
their highest point. Aside from the gold exports, the 
movements of money had not been at all unusual. The 
reported shipments to the interior between August i and 
August 22, accounted for a net loss of $4,100,000, con- 
trasted with $4,200,000, the year before. The disappear- 
ance of the surplus reserve was the signal for an attempt 
to liquidate call loans — loans which should not have been 
made. Even the contraction which was brought about 
was probably in no small degree due to the diminution in 
the amount of time loans, since the banks almost entirely 
ceased making loans on time and many of those made in 
previous months must have come to maturity. The com- 
motion in the money market and on the stock exchange 
was wholly unnecessary. It indicated on the part of the 
banks and the public an increasing tendency to regard 
the 25 per cent reserve as an irreducible minimum and 
not as a resource to be held in ordinary times for use 
in emergencies. Moreover, although crop-moving require- 
ments were only beginning, and although it was certain 
that a large amount of money must be sent away from 
New York in the course of succeeding weeks, every one 
was aware that there were ample funds available in the 
United States Treasury and that they would be placed at 
the disposal of the banks. 

As early as 1882 surplus revenue became a factor in 
the finances of the Government, but at that time there 



135 



National M on et ar y Commission 

was an ample amount of bonds outstanding which were 
redeemable at par. Momentarily reduced after the panic 
of 1884, the revenues of the Government soon reached 
even more formidable proportions than ever before. In 
1887 there were no more bonds outstanding which were 
redeemable at par, and further liquidation of the debt 
involved purchases at a premium in the open market. 
After some hesitation this policy was adopted, but, as was 
proper, the Treasury endeavored to secure the bonds upon 
terms as favorable as possible to the Government. The 
bulk of the bond purchases, therefore, were made at times 
when the money market was in a stringent condition, 
when holders were most willing to dispose of their bonds, 
or further delay was inexpedient. During the seven 
months from July, 1889, to February, 1890, the Treasury 
paid out some $42,000,000 more than it received, having 
purchased bonds to the amount of more than $70,000,000. 
In the succeeding five months to July the Treasury 
increased its cash holdings by more than $18,000,000, its 
moderate bond purchases being largely offset by the 
withdrawal of government deposits from the banks. It 
then held some $250,000,000, including the gold reserve of 
$100,000,000 and some $21 ,000,000 of more or less unavail- 
able fractional silver coin. About $54,000,000 of the re- 
mainder consisted of the bank-note redemption fund which 
had been transferred to the general fund of the Treasury 
by the act of July 14, 1890. This money was not a recent 
accumulation and, in fact, had been much greater in 
previous years. It will be seen, then, that aside from the 
$18,000,000 withdrawn between February and July, the 



136 



Crises Under National Banking System 

Treasury surplus was not a fund the building up of which 
had had any influence in bringing' about the actual money- 
market conditions which prevailed in the summer of 1890. 
Moreover, any payments by the Treasury in excess of the 
$18,000,000 would be in the nature of a windfall for the 
banks. 

The relief which the market expected from the Treasury 
was slow in making its appearance, though not on account 
of any unwillingness or delay on the part of the Secretary 
of the Treasury to make use of the government funds. 
On Tuesday, August 18, the Treasury offered to redeem 
$15,000,000 4>2 per cent bonds with interest to May 31, 
1 89 1. This offer not proving attractive to holders of 
bonds, on Thursday it was announced that the Treasury 
would redeem $20,000,000 of the 4^ per cents, prepaying 
the entire interest to the maturity of the bonds on August 
31,1891. It was on this day that call loans had advanced 
to one-half of i per cent a day, and the stock market was 
threatened with complete demoralization. Upon the 
announcement of this liberal offer of the Treasury trouble 
was largely allayed, the banks discontinued their efforts 
at wholesale contraction, and quotations on the stock 
exchange regained some of their loss. The whole episode 
illustrates the groundlessness of the disturbance, since 
the amount of money actually secured from the Treasury 
by the New York banks was inconsiderable. Only 
$9,000,000 of bonds were presented for payment up to 
the end of the month, and the amount actually received 
by the New York banks was by no means so large as this, 
as many holders were scattered throughout the country. 



137 



National Monetary Commission 



Treasury operations for the month as a whole set free 
only $7,500,000. Further efforts were evidently required, 
and on August 30 the Treasury offered to take another 
$20,000,000 of the 4^ per cent bonds on the same terms 
as before. On September 6 the Treasury offered also to 
prepay the interest of the 4 per cent bonds up to and 
including July i, 1891, amounting to $23,000,000. It is 
worthy of note, however, that not all of the holders made 
the necessary application for the interest upon these bonds. 
Notwithstanding these various devices, the Treasury was 
not paying out money rapidly enough to prevent further 
reduction in the reserves of the New York banks. The 
following table shows the course of events as reflected by 
the bank statement and call-loan rates for the period 
under review, and carries on the record to the close of 
September : 

New York Bank Statement. 
[In millions.] 



1890 

Aug. 9 

16 

23 

30 

Sept. 6 

13 

20 .. 

27 



Loans. 



$406 
402 
397 
392 
39S 
393 
392 
3 94 



Reserve. 



6103 
99 
94 
95 
95 
92 
99 
"S 



Net 
deposits. 



M07 
399 
389 
385 
388 
388 
390 
406 



Surplus 
reserve. 



dall-loan 
rates. 



3-20 

3-25 

3-i8g 

2-iS 

3-12 

3-189 

2-96 

2-6 



For two weeks after the stringency in August the re- 
serves remained almost stationary, but in the week end- 
ing September 13 there was a loss of $3,500,000, and the 



138 



Crises Under National Banking System 

reserve deficit of $3,300,000 was the most considerable 
of the year up to that time. The banks again resorted 
to loan contraction, and the high rates of August once 
more became a factor in the situation. As one writer 
expressed it, "The stock market was almost strangled 
by the restriction in the money market." The fall in 
security quotations was even greater and more general 
than in August. At length the hand of the Secretary 
of the Treasury was clearly forced. Four per cent bonds 
had been purchased for the sinking fund in July at prices 
ranging from 122.26 to 124. On Monday, September 17, 
the Treasury invited offers of bonds to the amount of 
$16,000,000, and accepted nearly $17,000,000 at prices 
ranging from 125 to 126^^, calling for a disbursement of 
more than $21,000,000. These bonds were largely sup- 
plied by a New York syndicate, and the money received 
in payment went directly into the banks, accounting 
for the enormous increase in the reserves from $92,000,000 
on September 13 to $115,000,000 on September 27." 
The net addition to the money in circulation secured from 
the Treasury during September reached the enormous 
total of $57,887,000, and for the three months from July 
I nearly $70,000,000 had been secured from that source. 
Upon the basis of the money thus secured the loans 
of the banks began to increase and ease was restored. 
Between September 20 and October 1 1 the loans of the New 
York banks increased from $394,000,000 to $407,000,000, 

o For a circumstantial statement from a generally conservative source 
to the effect that the bonds were held by a group of operators engaged in 
manipulating the market, see Bankers' Magazine for October, 1890, 

p. 248. 

6158 ID ID 139 



National M on et ar y Commission 

and stocks recovered some of their September loss. Crop- 
moving requirements were, however, causing the reserve to 
fall away once more, and on October 15 it was $15,000,000 
below the figure for September 27, and again the banks 
were below the required reserve by $349,000. 

I/Oan contraction once more became the order of the 
day, but on this occasion pressure upon borrowers was not 
carried to the extremes which had characterized August 
and September. During the three weeks ending Novem- 
ber 8, loans were reduced a little more than $7,000,000, and 
the highest rate quoted on any one day for call loans was 
30 per cent. There was a further decline on the stock 
exchange, but at no time was panic threatened. London 
sales of American securities were an important factor 
during these weeks and contributed largely to the fall in 
quotations which was particularly severe in standard 
stocks, many of which reached the lowest level of the year. 

These recurring periods of monetary stringency were 
due almost wholly to domestic causes, only indirectly 
and to a relatively small extent were they the result of 
the European situation. Even the fall in the prices 
of securities was probably quite as largely due to loan 
contraction as to London sales. Gold exports of the 
early summer had to some extent depleted the reserves 
of the banks, but the loss from withdrawals for crop 
moving purposes was of much greater magnitude. But 
these withdrawals, it should be noted, were not by any 
means of an unusual character. Between July i and 
November 8, 1889, the reported net shipments of currency 
to the interior from New York were $35,500,000. For 



140 



Crises Under National Banking System 

the same period in 1890 they amounted to $34,900,000. 
The conchision can not be escaped that an insufficient 
reserve in New York during the first half of the year was 
the inevitable cause of the disturbance in the summer 
and autumn months. 

We now enter upon the final stage of the monetary 
disturbance of this eventful year. Up to the second week 
of November there had been no important failures, either 
banking or mercantile. But the decline on the stock 
exchange had carried quotations below the level reached 
during the panic of 1884. It was evident that further 
decline could hardly fail to bring about extensive failures 
and undermine general confidence. This was the general 
situation on Friday, November 7, when the Bank of Eng- 
land advanced its rate of discount from 5 per cent to 6 
per cent. An advance of i per cent in the Bank of 
England rate is according to custom, but as the rate is 
seldom changed, except at the regular meeting of the 
directors on Thursday, this action naturally gave rise to 
a general feeling of apprehension and alarm. On the 
following day the New York bank statement showed a 
decrease of $4,254,000 in the reserve and a reserve deficit 
of $3,544,000. From this point the narrative of the course 
of events is taken from the annual review of the Com- 
mercial and Financial Chronicle for 1890. 

During the week of the crisis the record was substan- 
tially as follows: 

On Monday, November lo, there was heavy London selling and great 
depression, and the death of Mr. James Struthers occurred at the stock board 
and caused an adjournment for half an hour about noon; money was one- 
half per cent a day plus interest. Oh Tuesday, the nth, London advices 
were strong, as the Bank of England obtained a loan of £3,000,000 gold 

141 



National M o n et ar y Commission 

from the Bank of France; but the Villard stocks broke badly, and Decker, 
Howell & Co.'s failure was announced about 2 p. m., the Bank of North 
America being also involved. The clearing-house committee then met and 
resolved to issue clearing-house certificates, and this relieved the banks, 
though the news of this issue was not known till after business hours. 
Messrs. Charles M. Whitney & Co., bankers, failed, and also Mr. David 
Richmond, an old member of the stock exchange. On Wednesday, the 
12th, the tone was much improved; money relaxed with the knowledge 
that clearing-house certificates were issued. Messrs. J. C. Walcott &. Co., 
stock brokers, suspended; the North River Bank closed. On Thursday, 
the 13th, the feeling was still better, but the North American Company's 
stock fell from 16 to 7, recovering slightly afterwards, and the market 
resisted very well; the Bank of England rate remained at 6 per cent, which 
was encouraging. On Friday, the 14th, the market was weak and sensitive, 
but without special features. On Saturday, the 15th, early cables from 
Londou announced the embarrassment of Baring Brothers & Co., and this 
led to a feeling of panic at the stock board, and the sales in two hours of 
business reached 424,000 shares. On Monday, the 17th, the failure of 
Mills, Robeson & Smith was announced, occasioned by the forgeries of 
A. H. Smith, carried on for some years by raising the face value of stock 
certificates; Messrs. Randall & Wierum and Gregory & Ballon suspended; 
the Bank of Commerce passed its resolution against the contraction of loans 
and took out $500,000 in clearing-house certificates — the resolution said: 
" In the opinion of this board expansion is the heroic remedy for present 
ills rather than unceasing contraction;" money was at one-half per cent a 
day and the depression was great. On Tuesday, the i8th, Messrs. P. W. 
Gallaudet & Co. failed, and it was made known also that the North River 
Bank could not open, but must go to receiver. On Thursday, the 20th, 
Barker Brothers & Co. failed in Philadelphia, but this did not affect the 
market greatly, although they were involved in large financial operations 
with several railroads; the Bank of England rate remained unchanged at 6 
per cent and the tone in stocks was getting perceptibly stronger. On 
Friday there was a very sharp improvement, and many stocks rebounded 
from the depression, which had been severe until Wednesday; the tone 
was almost buoyant, and although the feeling was not fully maintained 
the general market in the next week ending November 29 was very strong 
and leading stocks advanced from 5 to 8 points. « 

The disturbance, it will be noted, was of short duration 
and did not at any time get beyond control. The prompt 
action taken by the clearing-house authorities did much 
to prevent the spread of panic. It is not improbable that 

o Commercial and Financial Chronicle, January 3, 1891, p. 16. 

142 



Crises Under National Banking System 

some intimation of impending trouble in London may have 
been conveyed to bankers in New York. As in 1884, no 
provision for equalizing reserves was adopted. When the 
issue of loan certificates was authorized on both occasions 
they were intended to meet the requirements of particular 
institutions rather than a general situation. In spite of 
the issue of certificates, loans which had been reduced by 
$5,500,000 for the week ending November 15 were reduced 
still further in the two following weeks by $8,700,000. 
There seems to have been some hesitation among the 
banks to take out certificates from the fear that such 
action would be regarded as a confession of weakness. 
A striking example of a more far-seeing view was afforded 
by the Bank of Commerce, one of the strongest banks in 
the city at that time. On Monday, November 17, the 
following resolution, presented by Mr. A. A. Low and 
seconded by Mr. J. P. Morgan, was passed by the directors: 

Resolved, That the directors of this bank desire to express their entire 
approval of the action of the Clearing House Association in so promptly 
providing for the issue of the clearing-house certificates against satisfactory 
collateral. 

Resolved, That the officers of this bank are directed to invite the con- 
sideration of the national and state banks, associated as ipembers of the 
clearing house, to a policy of forbearance in respect to all loans with parties 
in good standing, extending such indulgence as circumstances may warrant, 
to the end that all the banks and trust companies in the city may not be 
simultaneously calling on their customers for money at a moment when 
all are reluctant to lend. 

In the opinion of this board, expansion is the heroic remedy for present ills, 
rather than unceasing contraction — necessary alike for the promotion of 
confidence and the maintenance of the value of all assets in possession of 
our moneyed institutions. 

Resolved, That in furtherance of the above, the officers be and are hereby 
directed to apply for clearing-house certificates to such an extent as may 
from time to time be deemed advisable. <i 

o Bankers' Magazine, May, 1891, p. 417. 
143 



National Monetary Commission 

These resolutions emphasize one of the two specifics for 
the proper treatment of a panic — the continuance of loans 
to solve-nt borrowers. A second equally important specific 
is the prompt payment by the banks of every demand by 
depositors for cash. In this particular instance the banks 
were not subjected to a severe test of their ability and 
willingness to apply this remedy. Withdrawals by no 
class of depositors went beyond normal requirements and 
the reserves of the banks did not undergo any material 
change. The contraction in loans did not occasion any 
such degree of stock-market strain as had occurred in 
August and September. Rates went to the same high 
level of 1 86 per cent, but the period of high rates was 
somewhat shorter than in September. Within a week 
after the announcement of the Baring failure on Novem- 
ber 15, call-loan rates were quoted between 2 per cent and 5 
per cent. Large purchases were being made by investors, 
and the stock market was reported as steady, strong, and 
almost buoyant. Although call-loan rates were not con- 
stantly maintained at this extremely low level, it is still 
within the truth to say that after November 20 the 
monetary situation ceased to be a serious factor in the 
stock market or elsewhere.'* 

The following table shows the course of events as 
reflected by the bank statement and call -loan rates 
between November i and December 15, 1890: 

o There was a flurry in the money market on December 8, and call loans, 
largely through manipulation, again rose to 186 per cent, but in the course 
of the day fell again to 6 per cent. 



144 



Crises Under National Banking System 



New York bank siatement. 
[In millions.] 



1890 

Nov. I 

8 

IS 

22 

29 

Dec. 5 

n 

18 



Loans, 



$399- 
35 

393- 
387. 
384. 
386. 
386. 
3i 



Reserve. Deposits. Surplus 
reserve. 



8 


$99. 


9 


95 


3 


95 


3 


95 


5 


95 


S 


91 




4 


94 
99 



$396 
392 
386 
381 
378 
376 
376 
380 



Call-loan 
rates. 



% - 30 
3 - 25 

■2\i- 186 

2 - 186 
2-8 

3 - IS 

2 - 186 
2-6 



The banks of Philadelphia and Boston also resorted to 
the issue of clearing-house certificates. In these cities, as 
well as in New York, the primary object was to meet the 
requirements of particular banks. A detailed account of 
the issue of loan certificates in 1 890 appeared in the report 
of the Comptroller of the Currency for 1891 and will be 
found in the appendix.** 

As in 1884, the issue of loan certificates was not followed 
by the suspension of payments by the banks. One episode 
which occurred early in December, however, affords evi- 
dence of the danger of suspension if no provision is adopted 
for the equalizing of reserves when loan certificates are 
issued. The course of the later crises gives significance 
to the following account taken from the Commercial 
and Financial Chronicle: 

A feature which has caused some remark this week has been the payment 
at the subtreasury over the counter in gold coin and notes of about two- 
thirds of the disbursement made by the Government on account of bond 
purchases, instead of the checks taking the usual course and being collected 
through the clearing house. This change is thought by some to indicate 

« Appendix, Note E, pp. 387-392. 



145 



National Monetary Commission 

that the money received is to be hoarded by the people and companies who 
sold the bonds, and not to go into banks. That may be true in a measure. 
But as a further explanation, we would state that this method of collecting 
government checks has for a number of weeks been in operation, it having 
been practiced by our clearing-house banks. Indeed, this practice explains 
in part the recent large increase in loan certificates. These certificates are 
used, of course, to pay debtor balances at the clearing house. These bal- 
ances are not perfectly natural; that is to say, they occur through a with- 
holding of all subtreasury checks from the clearings and collecting them, 
as stated, in gold over the subtreasury counter. The result is that the 
banks show an adverse balance at the clearing house, to pay which it uses 
a small amount of loan certificates; the receipts from the Treasury, how- 
ever, reenforce its gold reserve. This process, to be sure, makes no one 
richer or poorer, but it afi'ords currency for the supply of the demand from 
the interior without exhausting the banks which ship it.a 

By the means above described weak banks could gain 
cash and meet unfavorable clearing-house balances, which 
would otherwise have been smaller, by issues of cer- 
tificates, and strong banks could diminish favorable bal- 
ances which might only be met with certificates from 
other banks. The cashing of checks by depositors 
over the counters of banks of which they were not de- 
positors at the instance of their own banks would be sim- 
ply another step in the same direction. Working at cross 
purposes among the banks might easily become almost 
as serious as if loan certificates had not been issued, and 
the banks would soon inevitably drift into suspension. 

Foreign exchange rates followed the normal autumn 
course, illustrating the strength of the American position 
during that, season of the year. Notwithstanding the 
sales of American securities in London, there was no gold 
export movement after the middle of August. The ad- 
vance of the Bank of England rate to 6 per cent on Novem- 
ber 5 and the Baring disclosures caused rates to rise, 

a Commercial and Financial Chronicle, December 13, 1890, p. 808. 

146 



Crises Under National Banking System 

but not to the export point. The advance was but 
momentary; rates soon fell below par, and in the second 
week of December nearly $5,000,000 was taken from 
the Bank of England for export to the United States. 

The ordinary money requirements of this year were, 
as we have seen, entirely provided by the Treasury. 
Between July and December the cash reserves of the 
national banks were reduced by less than $3,000,000, 
from $280,900,000 to $278,000,000. As in other years, 
this slight loss was more than shifted to the city institu- 
tions. The reserves of the New York banks were re- 
duced $4,600,000, those of Chicago and St. Louis 
$2,500,000, and those of other reserve cities $1,500,000, 
a total of $8,600,000, while the reserves of the country 
banks were increased $6,700,000. Again, the funda- 
mental characteristic of our banking system was illus- 
trated, that for any extraordinary cash requirements the 
reserves of the country banks are an unused asset. Evi- 
dence was again given which should have brought home 
to city institutions the heavy responsibility which they 
incurred in attracting the reserves of other banks. 

During the same months of 1889, there was compara- 
tively little financial disturbance, although the reserves of 
the banks fell off more than $24,000,000. Explanation of 
the difference is to be found in the loan and deposit 
situation. In 1889 the ratio between deposits and the 
reserve was such as to make it possible for the banks to 
increase loans. In 1890 loan expansion had gone beyond 
the permanently available resources of the banks. The 
difficulty which was encountered in carrying through a 

147 



National Monetary Commission 

very moderate amount of loan contraction was evidence, 
not that the community needed additional credit, but that 
business was already extended beyond the limits of safety 
set by adequate supplies of working capital. 

Although the reported net shipments of the New York 
banks to the interior between July and the end of Decem- 
ber were more than $50,000,000, the amount of bankers' 
deposits held by them was reduced but slightly, from 
$170,000,000 to $153,000,000, between July 18 and Decem- 
ber 19. A number of possible explanations of this unusual 
result may be mentioned. The trade relations of the rest of 
the country with the East may have given western and 
southern banks a favorable balance of payments, and 
the investment of eastern capital in the West may have 
contributed to this result. In the second place, the 
bonds purchased by the Government were to some extent 
held outside of New York, though the immediate pay- 
ments made by the Treasury may have been made 
through the New York banks. Again, loans of outside 
banks in New York, if liquidated, would provide the means 
for drawing funds from that city. This last factor has 
become of enormous importance in quite recent years. It 
was not mentioned in 1890, and was not probably impor- 
tant, as the western and southern banks were then hardly 
able to satisfy the requirements of local borrowers. 
Finally, the banks seem to have rediscounted freely at 
the eastern money centers. The amount of rediscounts 
and bills payable increased from $22,000,000 to $37,000,000 
between July and December, the most considerable in- 
crease which had occurred at any time since the organi- 



148 



Crises Under National Banking System 

zation of the national banks. In 1873 there was no 
increase whatever in these items, and in 1884 there was 
an increase of only $4,000,000. 

The assistance afforded the money market by the 
Treasury was a subject which was much discussed, and 
upon which quite opposite opinions were expressed. 
That it was proper for the Treasury to restore to general 
circulation money which it had recently withdrawn was 
not questioned. From this position many, including the 
Secretary of the Treasury, went on to the conclusion that 
a treasury surplus was a desirable means for safeguard- 
ing the credit structure of the country. This view was 
expressed in the annual report of the Secretary of the 
Treasury for 1890, extracts from which containing the 
account of the Treasury operations during the year will 
be found in the Appendix." It is unquestionable that 
a supply of money, whatever its source, is of the 
very greatest utility in an emergency, but it is a far 
cry to the conclusion that the Government rather than 
the banks is the organ which should provide this re- 
source. The unfavorable effects of treasury assistance 
were thus set forth in the Chronicle. 

The time was when our banks provided beforehand for the fall trade, 
and so trimmed their sails, if we may be permitted to use the expression, 
through the summer months as to avert a storm by preparing themselves 
for the crop demand. Of late years they have looked to the Treasury 
wholly, and have gone through the summer trenching on their reserves 
regardless of any increased drain sure to come later on. b 

New York bankers denied strenuously the justice of 
this criticism. The president of the Park Bank, one of 

« Appendix, Note F, pp. 393-399. 

& Commercial and Financial Chronicle, December 6, 1890, p. 754. 



149 



National Monetary Commission 

the largest holders of bankers' deposits, asserted that, 
" we always prepare ourselves carefully for the fall demand 
for money for the movement of the crops * * * and 
keep our loans and reserves throughout the summer for 
this purpose." The cashier of another almost equally 
important bank observed ' ' that as far as we know the 
banks of this city do not intend to make their calcula- 
tions relying on the Treasurer of the United States' for 
assistance in perfecting the same, nor do we consider 
they should or that it would be wise to do so." "■ 

We may accept the contention of the bankers that the 
Treasury surplus had had no influence upon their reserve 
policy, but for a reason less complimentary to their 
sagacity than those which they put forward. In years 
when there was no available surplus in the Treasury we 
have seen that the New York banks failed to carry an 
adequate reserve, and there is every reason to suppose 
that had there been no surplus in 1890 the banks would 
have carried a full line of credit, and that their reserves 
would not have been more adequate. We may therefore 
accept the view of the Secretary of the Treasury that 
the government surplus would serve to supply means for 
crop-moving purposes which the New York banks would 
not have been able to supply without general financial 
disturbance. On the other hand, the Treasury surplus 
was by no means a solid foundation for the credit struc- 
ture. It could not be expected that there would always be 
a government surplus, but while it continued the necessity 

oFor these and other similar opinions expressed by various New York 
bankers, see David Kinley, The Independent Treasury of the United 
States, p. 293. 

150 



Ci'ises Under National Banking System 

of making provision for emergencies was far removed from 
the banks. Very likely the banks might not have provided 
these means at once, but the likelihood that they would 
ever come to a proper understanding of their responsibili- 
ties was distant so long as the surplus remained. 

In only one direction did the experience of the year 
bring about a change in banking practice, and that was 
of secondary importance. It will be remembered that 
the three banks which became involved in difficulties in 
November were all state institutions. The clearing- 
house rule requiring all members to hold a 25 per cent 
cash reserve had not been strictly adhered to for many 
years by a large number of the state banks in the associa- 
tion. Since more than three-fourths of the clearing- 
house banks were national banks, it was not a difficult 
matter to secure action looking toward a more rigorous 
rule." This, however, did not in itself serve to increase 
greatly the power of the New York banks in an emergency. 
The resources of the state banks were less than one-sixth 
those of the national banks, and they were engaged in a 
purely local business. This action of the clearing house 
was probably a result of the increasing tendency to re- 
gard the 25 per cent reserve as a permanent requirement, 
not to be reduced in any circumstances. The acceptance 
of such a belief was certain to involve trouble in an emer- 
gency if it did not lead the banks to maintain considerably 
more than the minimum requirement in ordinary times, 
so as to have a large amount of free cash to meet 
extraordinary occasions. 

<i Bankers' Magazine, March, 1891, p. 673. 
151 



National Monetary Commission 

A much more fundamental change in the organization 
in the New York money market came with the estab- 
lishment of the stock-exchange clearing house in May, 
1892. It led to a very considerable reduction in the 
clearing-house exchanges of the banks and also, and more 
important, in the volume of certified checks. Over- 
certification ceased to be a factor of the first magnitude 
in the banking methods of the city. Had not this ar- 
rangement for stock-exchange dealings been set up, it is 
probable that it would have been necessary to close the 
stock exchange in 1893 and in 1907, and it is also prob- 
able that the volume of business transacted in the years 
after 1897 could not have been handled. 



152 



Chapter IV. 

THE CRISIS OF 1893. 

In previous chapters attention has been centered upon 
the New York banks because their operations were the 
most important banking factors both before and during 
the emergencies which have been analyzed. We have 
seen that the New York banks did not normally maintain 
the large reserves which the responsibilities of their posi- 
tion demanded. We have also seen that the methods of 
handling difficult situations were upon the whole wise and 
adequate for the purposes in view, so far as the means of 
the banks allowed. We now approach a crisis which, so 
far as it was due to banking causes, was a result of banking 
operations in other parts of the country. The strain upon 
the New York banks was not on that account less severe ; 
but, though they were not as strong in cash reserves at 
the time as the responsibilities of their position demanded, 
they were far more amply provided with cash than has 
been customary in periods of active business either before 
or since. On the other hand, we shall find that in handling 
the situation there was an absence of the intelligent and 
bold action which did so much to extricate the banks from 
a situation of equal if not greater seriousness in 1873. 

MONETARY AND BANKING MOVEMENTS, 1890-1893. 

The course of events between the panic of 1890 and the 
crisis of 1893 centers about the monetary history of the 
period. The crisis itself was a result of complex causes, 

153 



National M on et ar y Commission 

among which the monetary situation was by no means 
certainly the ijiost important. This is especially true of 
the causes of the long years of depression which followed 
its outbreak. Among these causes may be mentioned 
unremunerative prices for agricultural staples, and the 
heavy load of farm-mortgage indebtedness; also railway 
receiverships, which were due to the oversanguine esti- 
mates of the future and reckless financing of the wildest 
sort. Even the unsatisfactory banking position at the 
time of the crisis seems to have been far less a product of 
monetary conditions than has been usuall}^ supposed. At 
the risk of exaggerating the importance of the monetary 
influences it will, nevertheless, be convenient to make that 
history the point of departure in the study of the course 
of events which preceded the crisis of 1893. 

Almost exactly $100,000,000 had been added to the 
money supply of the country during the last six months of 
1890, and all of this increment was, as we have seen, out- 
side the banks at. the time of the December return to the 
Comptroller of the Currency. With the end of the crop- 
moving period there came the usual return flow of money 
to the banks — a movement which was accelerated by the 
moderate decline in business activity during the winter and 
spring of 1891. The strengthening of bank reserves which 
would have been thus brought about was in a measure offset 
by gold exports to the unusual amount of $53,000,000 during 
the first six months of the year. This outflow was due to 
a number of causes and not a simple result of the silver- 
purchase law, as some zealous advocates of the gold stand- 
ard were inclined to argue. 



154 



Crises Under National Banking System 

Depression and credit contraction had gone much 
further in Europe than in this country, and as a natural 
consequence there was a considerable decHne in mer- 
chandise exports relative to imports. Between January 
and July, 1891, there was an excess of merchandise im- 
ports of $14,000,000, which, together with the course of 
foreign dealings in our securities, affords adequate explana- 
tion of the movement of gold. If the currency situation 
exerted any influence, it was indirect and remote. Had 
the currency been susceptible to contraction through 
internal causes it does not follow that gold would not have 
gone out, since the banks could have endured a considerable 
additional loss of cash without such a contraction of credit 
and advance in rates as might have influenced appre- 
ciably the course of business dealings. 

In itself the loss of the gold would not have been a 
serious matter if it had involved an equivalent contraction 
in the amount of money in the country, since business re- 
quirements were upon a smaller scale than at the same time 
in the previous year. A part of the loss, however, was 
offset by issues of treasury notes in payment for silver 
bullion. Moreover, Treasury operations, far from taking 
money from circulation as in previous years, added 
about $9,000,000 to the amount afloat in the country. 
Government expenditure had at length overtaken revenue 
and even gone beyond it a little, and this remained the 
constant situation of the Treasury throughout the period 
to the crisis. As a result of all these various influences, 
there was a net contraction of only $29,000,000 in the 
money in circulation between January and July, 1891. 

6158—10 II 155 



National Monetary Commission 

For the banks the immediate consequence of the partial 
failure of the currency to contract was favorable. Be- 
tween December and July their cash reserve increased 
about $32,000,000, and as there was only a moderate in- 
crease in loans the proportion of cash to deposit liabilities 
was somewhat improved. But the price which was paid 
for the temporary ease thus secured was a heavy one — the 
weakening of the gold foundation of the monetary system 
of the country. Contraction, always painful, would have 
been comparatively easy during a period of moderate 
decline in business activities. As it was, the deterioration 
in the quality of the money in the country through the 
loss of gold was intensified by additional amounts of every 
other kind of money of which the circulating medium was 
composed. 

Fears of the possible effects of continued gold exports 
were soon removed in consequence of the bumper crops of 
1 89 1, which were sold in unexampled quantity and at high 
prices in Europe, where there had been a complete failure 
of harvests in south Russia and less than an average crop 
elsewhere. During the six months to January, 1892, net 
gold imports were $34,000,000 and, together with various 
other influences affecting different elements of the money 
supply, brought about an increase of $89,000,000 in the 
amount of money in circulation. It is not surprising in 
these circumstances that no trouble was experienced in 
New York during the crop-moving months. 

The foreign demand for wheat stimulated a renewal of 
business and speculative activity, which continued to the 
outbreak of the crisis of 1893. In the stock market the 



156 



Crises Under National Banking System 

invigorating influence first made itself felt, and a buoyant 
market characterized the later months of the year. The 
loans of the New York banks, which had been stationary 
during the spring and summer, began to increase, and, 
notwithstanding the autumn requirements of the interior 
banks, no very great advance in rates for loans occurred. 
In the country generally the renewal of activity was a 
marked feature of the opening months of 1892. The stim- 
ulation of the foreign demand for our staple agricultural 
products did not, however, lead to anything like the rapid 
advance which occurred either in 1880 or in 1898. A pro- 
longed upward movement was subject to a number of 
adverse influences. The disturbances in 1890 had not been 
severe enough to clear the ground of all unsound under- 
takings. Moreover, Europe was still plunged in depres- 
sion, made all the more profound by the necessity of paying 
dearly for its food supply. Payment was made immedi- 
ately in cash, but in large measure ultimate payment was 
made by the return of American securities held abroad. 
Finally as in Europe there was no business and speculative 
activity, with its accompanying credit expansion, corre- 
sponding to what was taking place in this country, there was 
a relatively high level of prices here, which stimulated mer- 
chandise imports and influenced the export trade adversely. 
As a result of these various influences foreign exchange 
rates were almost constantly against this country during 
1892, and only in October and November were gold 
imports in excess of exports. The net loss from gold 
exports during the year amounted to $50,000,000. There 
was, however, no diminution in the amount of money in 



157 



National Monetary Commission 

circulation, but, rather, an increase of $22,000,000. In ad- 
dition to silver issues and excess Treasury payments there 
was also an increase of $8,000,000 in the note issues of the 
banks. With the cessation of government purchases the 
price of bonds had fallen enough to make it profitable for 
banks to take out additional circulation. During the year 
there was a notable increase in bank loans, but the greater 
requirements for reserves and the increased amount of 
money required outside the banks on account of more ac- 
tive business did not exhaust the cash resources and lending 
power of the banks, and no pressure was experienced in the 
money centers during the crop-moving period. Continued 
monetary ease was secured at the price of a still further 
deterioration in the quality of the money supply of the 
country. 

Before the close of 1892 another factor appeared in the 
gold-movement situation — the return of American securi- 
ties, owing to doubt among European investors of our 
intention and ability to maintain the gold standard. This 
influence, together with an increasingly unfavorable mer- 
chandise balance, caused gold to flow out in unexampled 
quantities, beginning with an export of $11,000,000 in 
December, 1892. During the first five months of 1893 the 
net loss was nearly $60,000,000. Even this drain did not 
greatly reduce the available stock of money in circulation, 
silver issues. Treasury payments, increased circulation, and 
domestic gold production offsetting all but $14,000,000 of 
the loss. Taking the entire period from January, 1 891, to 
June, 1893, there was an increase of $68,000,000 in the 
estimated amount of money in circulation. It will thus 



158 



Crises Under National Banking System 

be seen that the money available for use had not been 
reduced and that, however undesirable from a monetary 
point of view, considered simply on the banking side, there 
was no reason why the banks should have found them- 
selves at the beginning of the crisis poorly supplied with 
cash reserves. 

Contrasting the reserves of the banks in December, 1891, 
with those of December, 1892, there was an increase of 
$8,000,000, while the money in circulation increased about 
$37,000,000. Nearly $30,000,000, therefore, either was 
absorbed by banks outside the national system or went into 
every-day use in consequence of increasing population and 
greater business activity. The return for March, 1893, 
showed a loss of $4,000,000 in cash reserves, while there 
was a falling off in the total amount in circulation of 
$11,000,000. Between March and May the banks gained 
more than $8,000,000, and the total of money in circula- 
tion was stationary. There can be little doubt that the 
cash holdings of the banks would not have been as large 
as they were in May, 1893, if that contraction in the cur- 
rency had taken place which was needed to place it upon 
a solid foundation. It is possible, however, that the 
gradual inflation of the currency may have weakened the 
banks indirectly. On account of abundant cash reserves, 
the banks may have extended credit more freely during 
1 89 1 and 1892 than they would otherwise have consented 
to do. Between May, 1891, and September, 1892, the 
loans of the national banks increased from $1,969,000,000 
to $2,171,000,000. This increase was very general in all 
parts of the country. During the following eight months 



159 



National Monetary Commission 

to May, 1893, there was a slight contraction of $10,000,000. 
The banks of the New England and Middle Atlantic States 
had reduced their loans by $35,000,000; in the Southern 
States loans were stationary, while in the North Cen- 
tral and Western States there was a further increase of 
$25,000,000. 

This movement of bank loans clearly reflected the situ- 
ation in different parts of the country. The West had 
been most influenced by the profitable export trade of 
1 89 1, and business and speculative activities in that part 
of the country continued up to the outbreak of the crisis. 
In the East the cotton industry was unusually profitable 
in 1892, but in other lines there was only a moderate 
improvement. In the case of the railroads, while their 
gross earnings increased there was some falling off in net 
earnings. For this reason and because of the sales of 
securities held in Europe, the stock market during 1892 
was in general dull and quotations for standard securities 
ruled lower at the end than at the beginning of the year. 
There was therefore only a moderate increase in the loans 
of the New York banks during the year, although the rates 
for call loans were abnormally low. Activity on the stock 
exchange was largely in connection with speculation in in- 
dustrial companies and the financing of various combina- 
tions. Finally it may be noted that the inci*ease in loans, 
taking the country as a whole, was not greater than at 
many other periods of active business in our history and 
that the change in the proportion of reserves was not such 
as to weaken the banks very materially. In May, 1 89 1 , the 
proportion of cash reserves to deposit liabilities was 16.6 



160 



Crises Under National Banking System 

per cent, in 1892 it was 18.4 per cent, and in 1893 it was 
16.9 per cent. The statistical position of the banks was, 
therefore, reasonably satisfactory. 

On the other hand it became evident during the crisis 
that the banks had been carrying a large amount of loans 
which should have been long since written off or at least 
written down. These loans had been made in many 
instances before the panic in 1890, and in part they had 
been made more recently, serving to bolster up weak 
enterprises and to make an already unhealthy situation 
more unsound. In the Southern States real estate specu- 
lation in town lots and mineral lands seems to have been 
the most unsound element in the situation. There was 
comparatively little speculation in agricultural lands 
because the cotton crop of 1891 was not so exceptionally 
remunerative as had been the case with the cereal crops 
in the Northwest. It is possible that but for the silver 
issues the banks might have enforced a more rigorous 
policy against the renewal of loans and might not have 
increased the total of loans to so considerable an extent 
as they actually did. On the other hand the country 
banks, which were chiefly responsible for loan expansion, 
were well above their reserve requirements, and if there 
had been less money in the country it might have hap- 
pened that something like the same amount of credit 
expansion would have occurred upon smaller reserves. 
In that case deposits with reserve agents would not have 
been so large, and it is, therefore, in the operations of the 
city banks, if anywhere, that we must look for the bank- 
ing effects of the silver issues. Fortunately, the regular 



i6i 



National Monetary Commission 

returns of the banks give a clear answer to this ques- 
tion. The loans of the New York national banks were 
$365,000,000 in May, 1892, and in March, 1893, they had 
been reduced to $323,000,000, and in May to $307,000,000. 
In Boston there was a reduction during the same period 
from $156,000,000 to $142,000,000, and in most of the 
other reserve cities there was also some contraction, or at 
most a very moderate increase. In the eastern money 
centers the unsatisfactory monetary situation seems in 
some measure to have exerted a restraining influence. 
During 1892 the low rates for loans were a clear indication 
that the banks would have been glad to lend more than 
the demand of borrowers made possible. The situation 
was in marked contrast to the months preceding other 
crises when every available credit resource at the money 
centers has been stretched to the extreme limits of safety 
and beyond. For these reasons the opinion may be ven- 
tured that the silver issues were not an important factor 
in determining either the course of trade or the operations 
of the banks during the period which preceded the crisis 
of 1893. 

THE FIRST STAGE OF THE CRISIS. 

We must now follow tlje course of the New York money 
market during the months which immediately preceded 
the crisis. The usual return flow of money from the 
interior was not much below the normal during the winter 
of 1893, but it did not avail to increase the reserves of the 
banks on account of the enormous gold exports. During 
January, however, loans increased at a slightly more rapid 
rate than in 1892, but in February sufiicient impression 
had been made upon the reserves of the banks to lead to 

162 



Crises Under National Banking System 

some loan contraction and a slightly higher level of rates. 
These factors, however, had little to do with the first 
serious disturbance of the year which came with the failure 
of the Philadelphia and Reading Railroad on February 26. 
This railroad had taken the lead in absorbing coal lands 
and had also ventured into the New England railroad field. 
Both enterprises were far beyond the available capital of 
the company and its downfall was directly due to the 
weight of an enormous floating debt. The immediate 
effects of the Reading failure were comparatively moder- 
ate; but it gave rise to doubts of other companies, par- 
ticularly of the industrials, and the course of the stock 
market was depressed and downward throughout March 
and April. To this tendency high average call loan rates 
and the continued contraction of bank loans, of course, 
contributed. 

The course of the banking operations of the New York 
banks during the first four months of this and the preced- 
ing year is shown in the following table : 

New York bank statement. 



Net deposits. 



Surplus 
reser\'e. 



1893 

Jan. 7 

Feb. 4 

Mar. 4 

Apr. I 

May 6 

1892 

Jan. 9 

Feb. 6 

Mar. 5 

Apr. 2 

May 7 



M41, 000, 000 
46s, 000, 000 
453, 000, 000 
433. 000, 000 
425 , 000, 000 

444, 000, 000 
460, 000, 000 
488, 000, 000 
489, 000, 000 
493, 000, 000 



S4SS, 000, 000 
495 , 000, 000 
462, 000, 000 
439, 000, 000 
433, 000, 000 

477, 000, 000 
515, 000, 000 
533, 000, 000 
528, 000, 000 
531 , 000, 000 



SI22,000 000 
142, 000, 000 
122, 000, 000 
120, 000, 000 
121 , 000, 000 

138, 000, 000 

162, 000, 000 

154, 000, 000 
150, 000, 000 
147, 000, 000 



go, 900, 000 

18, 600, 000 

6, SCO, 000 

10, 600, 000 
I 2, 800, 000 

18, 900, 000 

33, 000, 000 

21 , 200, 000 

iS, 000, 000 
14, 800, 000 



163 



National M on et ar y Commission 

It will be noted that at the beginning of February, 1893, 
the banks held a surplus reserve of $18,600,000 contrasted 
with $33,000,000 in February, 1892. The statement for 
the first week in May, 1893, shows a surplus of $12,800,000, 
only $2,000,000 less than that in May, 1892. This com- 
paratively good showing had been secured, notwithstanding 
a loss in cash of $21,000,000 in 1893 as compared with 
only $15,000,000 in 1892, It had been secured through 
the contraction of loans from $465,000,000 to $425,000,000 
while in the previous year loans had been increased by 
$33,000,000. This contraction in loans had been carried 
out slowly and steadily and with comparatively little 
difficulty. It involved loss to holders of securities, 
especially those of the more speculative variety, but even 
in this respect it served a good purpose, since the condition 
of many corporations warranted a far greater decline than 
had actually taken place. Painful evidence of this fact 
was afforded by the disastrous failure of the National 
Cordage Company early in May. The course of events of 
which that failure was a determining factor was thus 
described in The Commercial and Financial Chronicle: 

Again our market has passed through a severe stock panic, and again 
the prodigious vitality of bankers and brokers has been abundantly demon- 
strated. On such an enormous and precipitate shrinkage in values it is 
very remarkable that so few houses have failed, and those that were com- 
pelled to suspend were more or less loaded up with the stocks of those 
companies which proved to be the bane of the market. 

A stock dividend of loo per cent in January and a receiver in May — this 
is the brief statement of a method of financiering which has lead up to and 
precipitated one of the worst stock panics of short duration that we have 
ever known in this city. The story is almost a counterpart to that of 
Philadelphia and Reading, which paid 5 per cent on its preferred income 
bonds just before going into receivers' hands. It may not be possible to 
prevent such methods altogether, but the public should get a clear idea 
of what terrible disaster is brought to thousands of innocent holders of 

164 



Crises Under National Banking System 

stocks and bonds, and the parties engaged in this sort of financial operation 
ought not to be held up as heroes of the day, although they may have per- 
sonal integrity. 

The open-market rates for call loans during the week on stock and bond 
collateral have ranged from 4 to 40 per cent, the average being 6 per cent. 
To-day rates on call were 6 to 40 per cent. Commercial paper quoted at 
6 to 9 per cent." 

Again, if we inquire how far the currency situation had 
anything to do with the course of events up 'to this time, 
the answer is clear that its influence was extremely slight. 
It was argued at the time that fears for the maintenance 
of the gold standard frightened investors and deprived 
worthy enterprises of additional capital. But the enter- 
prises which had failed were not worthy, and there were 
many more whose situation would have been made worse 
rather than better by additional capital, and an even greater 
number whose further expansion would have served only 
to provide facilities for the production of commodities 
already in excess of profitable demand. It was also 
argued that business was being deprived of needed circu- 
lating capital through wholesale credit contraction by 
the banks, but the returns of the national banks, at 
least, show that there had been no contraction what- 
ever. For the banks as a whole, between March 6 and 
May 4, there had been a slight increase of $3,000,000. 
In New York there had been a contraction of $16,000,000, 
in Boston $4,000,000, and in Chicago $4,000,000. In 
the country at large there was therefor an expansion of at 
least $27,000,000 up to the ist of May. Finally, it may 
be observed, that a situation which demands constantly 
increasing credits to prevent collapse is certain to arrive 

a The Commercial and Financial Chronicle, May 6, 1893, p. 743. 

165 



National M on et ar y Commission 

at that state in any case, and that delay can hardly be 
expected to improve matters. 

There is also no evidence of any general distrust of the 
banks up to this time. The total amount of money held 
by the banks, as we have seen, had increased somewhat — 
from $314,000,000 to $323,000,000 — and in the case of the 
New York banks from $94,500,000 to $98,000,000. There 
was, however, one change of a most unusual character 
disclosed by the returns of the banks for May. The 
amount due from reserve agents was reduced from 
$202,000,000 to $174,000,000, and in the case of the 
New York banks from $137,000,000 to $114,000,000. 
Changes in this item involve, usually, a shifting of cash 
holdings between the banks, but, as was noted above, the 
New York banks increased their cash holdings by $3 , 500,000. 
Explanation of this apparent anomaly is simple. The 
balance of payments for commodities was in favor of New 
York, and the rest of the country, particularly the West 
and South, was paying for the enormous imports of com- 
modities which had taken place during preceding months. 
In other words, the gold exports were in the last analysis 
due to the obligations of the people generally and not those 
of dealers in New York City. Another indication that the 
balance of payments between New York and the rest of 
the country was in favor of New York may be mentioned : 
Drafts on New York received in payment for commodities 
would increase individual deposits and diminish bankers' 
deposits. Some such influence is suggested by the fact 
that, though loans were reduced by $16,000,000 and 
clearing-house exchanges by $1 1,000,000, there was a posi- 



166 



Crises Under National Banking System 

tive increase in individual deposits. The result of all 
these changes was to place the New York banks in a vastly 
stronger position in May than in March. The proportion 
of reserve to net deposits had increased from 26.34 P^r 
cent to 28.52 per cent, and the proportion of bankers' 
deposits to total deposits had diminished. 

THE SECOND STAGE OF THE CRISIS. 

Following the stock market collapse of May 4 the mar- 
ket was irregular and dull throughout the remainder of 
the month. The lending rates of the banks were moderate, 
but a further decline in the volume of loans continued, and 
on May 27 they stood at $415,000,000, some $10,000,000 
less than at the beginning of the month. In the mean- 
time, the banks had been receiving large amounts of money 
from the interior, and, notwithstanding continued gold 
exports, the reserves rose from $121,000,000 to $134,000,- 
000. The position of the banks, therefore, at the end of 
May had distinctly improved; they were, in fact, stronger 
than at the same time in the previous year, as is evident 
from the following table: 

New York Bank Statement. 





May 27. 1893. 


May 28, 1893. 




$415, 801 , 000 

436, 724, 000 

134, 621 , 000 

25. 439.000 


$488, 000, 000 
536, 000. 000 
158, 000, 000 






Surplus reserve 








30.82 


29.38 





During the following week there was a loss of $5,700,000 
in reserves, principally on account of gold exports, which 

167 



National Monetary Commission 

excited no particular alarm, but the loss for the week 
ending June lo was not only more considerable — nearly 
$10,000,000 — but it was also the beginning of an entirely 
new stage in the crisis. Up to this time receipts of cash 
from the interior had been fairly large. For the week 
ending June 2 the reported movements of money between 
the New York banks and the interior showed a net gain of 
$2,500,000; but the following week shipments were over 
$8,000,000 and were nearly as much for the week end- 
ing June 16. In the three weeks ending with June 17 the 
reserve of the New York banks was reduced from $134,- 
000,000 to $110,000,000 and the surplus reserve fell from 
$24,600,000 to $8,700,000. 

The cause of this abrupt change was certainly not in 
any definite way connected with the silver situation. In- 
formation that the administration would move for the 
repeal of the Sherman silver purchase act had already 
been made public. The withdrawal of money from New 
York was directly due to the failure and suspension of 
large numbers of banks, both state and national, and 
of private bankers in the West and South. Nineteen 
national banks were placed in the hands of receivers during 
May and June, and the number of state and private banks 
which fell was even greater. The causes of these failures 
were in most instances, as was pointed out by the Comp- 
troller of the Currency, due to "violations of law and 
imprudent methods of banking, and the closing of them 
was only hastened by the general condition of financial 
affairs. Some failed because of criminal acts on the part 
of the officials in charge and others because of the lack of 



168 



Crises Under National Banking System 

proper comprehension of the purposes of a bank," '^ Quite 
apart from mismanagement it was inevitable that some 
banks should have gone to the wall in consequence of the 
many mercantile failures, 3,401 in number, with liabilities 
of $169,000,000, which occurred during the period from 
January to July, 1893. These failures exceeded both in 
number and in the amount of liabilities those which had 
occurred in any other period of equal length in our history. 
Bank suspensions were almost as numerous as bank fail- 
ures and seemed to have been due to a greater variety of 
causes. In some instances banks were forced to suspend 
temporarily because of the distrust excited by the failure 
of banks in their neighborhood. In other instances it was 
on account of the distance which separated banks from 
their reserve agents.'' 

In the eastern money centers bank failures and suspen- 
sions were attributed almost entirely to the silver influ- 
ence. But it is to be noted that they occurred principally 
in the West and Southwest, where there is no evidence 
that people were distrustful of silver money. Had the 
monetary influence been potent, we should expect to find 
numerous failures in the eastern States and also some 
discrimination on the part of depositors between the differ- 
ent kinds of money in circulation. Distrust of the sol- 
vency of the banks rather than dissatisfaction with the 
circulating medium was clearly the direct cause which 
brought about runs upon banks and the numerous failures 
and suspensions. 

« Report of the Comptroller of the Currency for 1893, p. 10. 
6 For a list of suspended banks, with dates of suspension and resumption, 
see Comptroller's Report for 1893, p. 78. 

169 



National Monetary C ommis s io 



n 



So far as the national banks were concerned it mattered 
little that the relative number of disasters among them 
was considerably less than among state institutions. The 
spread of distrust and the contagion of panic are essen- 
tially products of unreasoning fear. Moreover, the na- 
tional banks of the cities held large balances of state as 
well as of national banks, and to call home some portion 
of these balances was in the circumstances the natural and 
proper course for the country banks. 

One element of weakness in the situation had disap- 
peared. With the shipment of $1,000,000 on June 6 gold 
exports ceased, and from that time to the end of the crisis 
foreign exchange rates never fell to a point which suggested 
the likelihood of the renewal of the movement. Indeed 
$500,000 was engaged from London for export to the 
United States on June 21. But the peculiar seriousness 
of the situation was at once recognized by the New York 
banks. Never since the establishment of the national 
banking system had they been confronted with a like situ- 
ation — widespread distrust of the solvency of their banks 
among the people in entire sections of the country. The 
ability of the New York banks to maintain payments was 
not as yet in question. But though no bank in the city 
was in difficulty and there was still a surplus reserve on 
June 17 of $8,700,000, the machinery for the issue of 
clearing-house loan certificates was set up on the 15th of 
June. 

The New York banks had never resorted to the issue of 
clearing-house loan certificates at so early a stage in any 
previous crisis. The following statement, taken from the 



170 



Crises Under National Banking System 

Commercial and Financial Chronicle, clearly sets forth the 
considerations which led to this wise action: 

Much interest has been taken in the decision of the New York clearing- 
house banks to issue clearing-house certificates if the heed for so doing arises. 
The statement issued by the banks on June lo showed a heavy reduction 
in the reserve, owing to withdrawals for the West, and this week, as already 
said, the shipments to the interior have been remarkably large, the dis- 
turbed state of affairs in certain sections leading financial institutions there 
to increase their cash resources. The agreement of the New York banks 
to issue clearing-house certificates is a precautionary measure, which will 
tend to prevent contraction of loans if this drain goes on, at the same time 
showing the confidence the banks have in one another. More than this, it 
will be useful in inducing the clearing-house associations of other cities to 
take some similar course of united action. None of the certificates have 
thus far been issued. « 

Suspension of cash payments was not at that time asso- 
ciated in the mind of anyone with the issue of clearing- 
house loan certificates, and there is no evidence whatever, 
beyond the vague recollections of bankers at the present 
time, that suspension was immediately resorted to by the 
banks. Nowhere in contemporary journals has there been 
found a single reference to refusal or delay on the part of 
banks in meeting the demands of depositors for cash. If 
such occurred, it must have been exceptional and a result 
of the timidity of individual bankers. The issue of clear- 
ing-house loan certificates does not seem to have changed 
in the slightest degree the relations between banks and 
their depositors. This point is of the very utmost impor- 
tance, because in 1907, as we shall see later, the tradition 
seems to have become established among New York banks 
that the issue of clearing-house loan certificates and the 
suspension of cash payments are virtually one and the 
same thing. 

a Commercial and Financial Chronicle, June 17, 1893, p. 1000. 
6158 — 10 12 171 



National M o n et ar y Commission 

After the authorization of clearing-house loan certifi- 
cates the reserves of the New York banks continued to 
fall away, the loss between June 1 7 and July 8 amounting 
to nearly $16,000,000, making a total loss since the begin- 
ning of the movement of $40,000,000. Loans also were 
further reduced during the week ending June 24 by nearly 
$5,000,000, but during the two following weeks there was 
an increase of nearly $13,000,000. Money had become 
extremely stringent owing to the normal heavy require- 
ments at the close of the half year, and from June 29 a 
number of banks took out a large amount of certificates 
and oJEfered to lend freely. The bank statement for July 8 
found the banks for the first time during the crisis below 
reserve requirements with a deficiency of $5,082,000. 
During the following week loans were reduced $5,000,000 
and there was no appreciable change in reserve. There 
was a loss of only $323,000 and the reserve deficiency was 
reduced to $4,269,000. For the first time since the 
beginning of June reported movements of currency were 
in favor of the New York banks. The situation at that 
time was such as to give rise to hopes that the worst of 
the crisis was over. The prospects for the repeal of the 
silver-purchase law were good. Reports of runs upon 
banks in different parts of the country were less frequent 
and during the second week of July the number of failures 
was comparatively small. 

The middle of July may properly be regarded as the 
end of the second stage of this crisis. In its first stage the 
disturbance was largely confined to New York and was 
marked by the Reading and Cordage failures, a general 



172 



Crises Under National Banking System 



decline in the stock market, the steady contraction of loans, 
and improvement in the position of the New York banks. 
During the second stage there was no serious disturbance 
in New York, but the reserves of the banks were reduced 
by $40,000,000 on account of the withdrawal of money by 
banking depositors in the West and South. Serious strain 
had been met boldly and successfully, and had no further 
banking failures occm-red it is probable that, with the 
general trade depression which was setting in, the reserves 
of the banks would soon have reached large proportions. 
On July 12 the national banks made their usual returns 
to the Comptroller of the Currency, thus providing data 
for the analysis of the effects of the crisis upon the banks 
during this second stage of its course. The following 
table shows the condition of all the banks and the various 
groups of banks on May 4 and July 12, 1893: 



All banks: 

May 4 

July 12 

Country banks: 

May 4 

July 12 

Reserve city 
banks: 

May 4 

July 12 

St. Louis: 

May 4 

July 12 

Chicago: 

May 4 

July 12 

New York : 

May 4 

July 12 



a 2, 162 

2, 020 



I, 196 
I. 108 



526 
497 



96 



307 
308 



Net de- 
posits. 



1,910.0 
1 , 674. o 



970. o 
864.0 



464.0 
404. o 



27. 7 
10. 9 



99. 6 

81.3 



34S-0 
304-0 



Cash re- 
serve. 



323-0 
289. o 



109. o 
114. 8 



S-9 

4. 5 



29-3 
24. 9 



9»-4 

77.0 



Ratio to 
liabilities. 



17. o 
17- 2 



16.87 
16. 93 



29. 4 

30. 6 



28.5 

2.^3 



Total re- 
serve with 
agents. 



504.0 
456.0 



120. o 
1 10. o 



SS-S 
48. S 



Ratio to 
liabilities. 



26. 4 

27. 2 



24.4 
26.8 



28. 5 

29. 2 



o Numbers, except ratios, represent million-dollar units. 
173 



National Monetary Commission 

The contraction in loans amounting to $142,000,000, 
nearly 7 per cent of the total, was more considerable than 
in 1873 or in 1907. With the exception of the New York 
banks which increased loans $1,300,000 the banks every- 
where resorted to contraction. By this means, and 
through the reduction of deposits with agents and the loss 
of cash, net deposits were reduced by $236,000,000, or 
about 1 2 per cent. All classes of banks were able to reduce 
deposit habilities. Notwithstanding the loss of $34,000,- 
000 in cash the banks were able to increase slightly the 
ratio of cash to net deposits from 17 per cent to 17.2 per 
cent. The country banks, as in 1873, positively increased 
their cash holdings. The banks of the reserve cities and 
those of Chicago and St. Louis experienced some loss, but 
still increased slightly the proportion of cash to net 
deposits. All banks, therefore, except those of New York 
are found with a higher reserve ratio at the end than at 
the beginning of the two months of financial strain. 
About two-thirds of the cash loss fell upon the New York 
banks, and the ratio of their reserve to net deposits was 
reduced from 28.5 per cent to 25.3 per cent. While the 
causes of the disturbance were, in many ways, unlike those 
which brought about the crisis of 1 873, banking movements 
had taken almost exactly the same course. The banks in 
all parts of the country were relying upon the New York 
banks to supply them with the bulk of the money with- 
drawn by depositors, and by loan contraction were posi- 
tively strengthening themselves. Reliance upon the New 
York banks seems to have been even greater than is dis- 
closed by the figures which we have analyzed. Between 



174 



Crises Under National Banking System 

May 4 and July 12 the bills payable and the notes redis- 
counted of the national banks had increased from $40,- 
000,000 to $61,000,000, and it is reasonably certain that 
by far the greater part of this increase represented ad- 
vances made by New York banks to banks in the West and 
South. Advances of this kind explain the comparatively 
small reduction in the bankers' deposits in New York 
City which, between May and July, notwithstanding enor- 
mous shipments of cash, were only reduced by $6,000,000.'* 
It will accordingly be recognized that up to this time 
the New York banks had fully lived up to the most exact- 
ing requirements which the responsibilities of their position 
as central reserve agents placed upon them, and that they 
had made a vastly better showing than the banks in the 
other central reserve cities, Chicago and St. Louis. 

THE THIRD STAGE OF THE CRISIS. 

During the third week of July a second wave of distrust 
of the banks spread over the West and South. More than 
half of the Denver banks suspended and there were scat- 
tered failures at many points. The withdrawal of funds 
from New York was at once resumed and the reported 
net loss for the week ending July 22 was $2,800,000. 
The bank statement for the week, reflecting earlier con- 
ditions, showed a gain in reserve of $2,100,000 and through 

o Reduction in net deposits of the New York banks was chiefly in indi- 
vidual deposits, which were $286,000,000 on May 4 and $246,000,000 on 
July 12. This reduction is to be accounted for chiefly by the smaller 
clearing-house exchanges, which were $74,000,000 in May and $65,000,000 
in July, but, as clearing-house loan certificates were included in this item 
for the returns in 1893, the real reduction in clearing-house exchanges was 
in the neighborhood of $30,000,000. 



175 



National M o n et ar y Commission 

the cancellation of deposit liabilities, resulting from a con- 
traction of $4,300,000 in loans, the reserve deficit was 
reduced to $1,256,000. Early in the following week came 
bank failures in Chicago, Indianapolis, Milwaukee, Louis- 
ville, and smaller places, and the net shipments of the 
New York banks were $7,800,000. A customary feature of 
our crises was also announced; the Erie Railroad went 
into the hands of receivers. Beset with fears of other 
receiverships and with high call-loan rates the stock 
exchange suffered the worst decline of the year. The 
following account of the course of events during the week 
is taken from the Commercial and Financial Chronicle: 

Our markets have been more disturbed and excited this week than at 
any time this year. The situation looked unpromising when the week 
opened, and became daily more unsettled until Thursday, when there 
was a decided improvement; but yesterday the situation was again some- 
what less favorable. Monday and Tuesday an unusual number of failures 
among our banks and private firms were reported in various parts of the 
country, but especially in the West, some of them being concerns of long 
standing and held in high repute. On those days, too, rumors became 
hourly more distinct respecting the difficulties Krie's floating debt was 
causing the management and the probability of its becoming needful to 
put the road into the hands of receivers. Tuesday afternoon the announce- 
ment was made that receivers for the company had been appointed. On 
Wednesday the failures referred to, the Erie receivership, and the state 
of the money market caused an unsettled and feverish opening, which 
conditions were used, and used most effectually, by those seeking td break 
prices, values of all the leading stocks gradually melting away. This 
decline was favored by the fact that the outside public having money to 
invest either looked upon the Erie receivership as a more disturbing affair 
than the step warranted, or else were discouraged by the frequent flurries 
and declines in prices which have occurred of late, and so for the time being 
kept off the market. The next day, Thursday, the outlook, as already 
stated, was much brighter, and so it was yesterday, though there was some 
reaction from the previous day, a further large break in General Electric 
stock being a disturbing feature. 

Money on call representing bankers' balances was not stringent until 
Wednesday. The loans early in the week were from 6 t© 2 per cent, the 
latter figure being recorded on Monday after the inquiry for the day had 



176 



Crises Under National Banking System 

been satisfied and there seemed to be an abundance offered. The demand 
for currency for shipment to the West, stimulated by the failure of the 
" Mitchell" bank at Milwaukee and of banks at Louisville and Indianapolis, 
was urgent on Tuesday, and on the following day a calling in of loans by 
some of the banks and trust companies in this city and in Brooklyn created 
a disturbance in the money market, while the fall in stock values induced 
discrimination against collateral, and the rate was advanced to three- 
sixteenths of I per cent and interest, equal to about 74 per cent per annum, 
and large amounts were loaned at one-eighth of i per cent and interest, 
equal to 51 per cent per annum. On Thursday there was an early demand 
for money which caused 51 per cent to be again recorded, but in the after- 
noon the rate fell to 6 per cent. Yesterday the course was much the same, 
the range being 51 and 2 per cent, with the close at the lowest figure. 
The average for the week was probably about 10 per cent. Renewals 
were at from 6 to 8, and while banks and trust companies quoted 6, very 
little was loaned over the counter at this figure, and the institutions that 
had money to loan offered it in the stock exchange. Time contracts con- 
tinue in urgent demand and good rates are bid, but the supply is small 
and chiefly confined to private sources. Neither banks nor trust companies 
are making loans on time, but it is probable that a few of the insurance 
companies and other corporations have yielded to the importunities of 
brokers. The basis of the business is 6 per cent; in addition i per cent 
commission is paid for thirty days, i}4 per cent for sixty days, and 2 per 
cent for four months. Scarcely anything is done in commercial paper, 
and the few transactions made are at such rates as can be agreed upon. 
Many of the jobbing commission houses are advising the mills with which 
they do business to shut down, as it is impossible at present to make 
advances, and many of the mills at the East are consequently closing. « 

The bank statement showed a loss in reserve of 
$5,100,000, and a somewhat greater reduction in deposits, 
as loans were reduced $2,700,000. There was an increase 
in the reserve deficit of from $1,300,000 to $4,300,000, 
and the actual condition of the banks was certainly even 
more unfavorable than this showing of average conditions. 

We have now reached the crucial stage in this long 
period of financial strain, by far the most prolonged which 
the country has experienced in modern times. Suddenly 
and unexpectedly the bank's throughout the country, be- 

c- Commercial and Financial Chronicle, July 29, 1893, p. 162. 

177 



National Monetary Commission 

ginning with those in New York, partially suspended cash 
payments. The immediate consequences of this unfor- 
tunate step vv^ere serious; and it also had the more per- 
manent result of giving rise to an expectation of suspension 
upon future occasions of difficulty, which was the most 
serious cause of weakness disclosed during the financial 
disturbance of 1907. The general situation, therefore, at 
the time of suspension must be considered with great care. 
In some respects affairs were in a more critical state 
than in June; in other respects the situation was distinctly 
more satisfactory. The number of bank failures was not 
greater than those which had occurred during the two 
worst weeks in June. There were, however, a greater 
number of prominent city institutions involved and the 
number of suspensions was considerably greater; 33 na- 
tional banks suspended between July 14 and August i. 
Thereafter, the number of failures and suspensions was 
small and included no important banks, and the opinion 
was current even then that the difficulty from this source 
was largely a thing of the past. Moreover, there was no 
evidence of any sudden increase of panic at the begin- 
ning of August, and the demand for currency from New 
York was apparently no greater than that which had come 
during the second and third weeks of June. So far as 
the New York banks in relation to interior institutions 
were concerned, the situation was similar and there was 
no reason to believe that the continued demand for 
shipments of currency to the interior would not be dis- 
continued in the course of time in August, just as had 
been the case in July. 



178 



Crises Under National Banking System 

The disturbance on the stock exchange following the 
Erie failure may seem to have involved an element of 
weakness not present in June, but in fact the decline on 
the stock exchange strengthened the situation from a 
purely banking point of view. Foreign purchases of our 
securities were made in large quantity during the week 
ending with July 29, and these purchases continued 
throughout the month of August. Attractive bargains in 
shares were not the only cause of these purchases. For- 
eign observers had become convinced that the silver- 
purchase law would be repealed at the impending session 
of Congress, and were, therefore, confident of the future 
value of our securities. '^ 

There was, as we have seen, not a little exaggeration 
of the influence of silver money in bringing on the crisis. 
After the outbreak of the crisis it is, however, clear that 
the silver issues became a vastly more seriously disturb- 
ing factor. The difficulty of the Treasury in maintain- 
ing the gold standard was vastly increased, and the 
suspension of gold payments became imminent. Al- 
though the prospective repeal of the law could not serve 
to bring about renewed business activity, it did enable 
us to secure temporary assistance from Europe, which 

<J After another severe decline in prices at the stock exchange this week 
our market has been supported by the purchases of foreign buyers. This 
is a most hopeful sign, and it indicates that in London they consider the 
repeal of our silver law a foregone conclusion. Nor is it the first time 
that the foreigners have been able to take a clearer view of our affairs than 
we could get at home; for some weeks past their financial newspapers have 
been speaking of the repeal of our silver law as a necessity that would force 
itself upon us sooner or later, and their bankers are apparently willing to 
back up the opinion by taking some of our securities at the low prices 
now ruling. — TheCommeicial and Financial Chronicle, July 29, 1893, p. 171. 



179 



National Monetary Commission 

was of the utmost banking importance during the short 
acute stage of the crisis. 

Between the middle of June and the end of July gold 
had been imported at New York to the amount of more 
than $5,000,000.^ It had come in small consignments 
and from a great variety of sources. During the week 
ending July 29 gold began to move toward this country 
in quantity, between $2,000,000 and $3,000,000 being 
engaged for shipment, and during the following week 
more than $10,000,000 was secured. The fall in ex- 
change rates which made this possible was due to foreign 
purchases of our securities and also to a decline in mer- 
chandise imports and an increase in exports. Further 
importations were expected, and in fact occurred. It 
will therefore be seen that the New York banks could 
look forward to a supply of gold to take the place, at 
least in part, of shipments to the interior. 

Two further favorable elements in the situation may 
be noted, though they were of minor importance. The 
savings banks decided to enforce the legal notice for 
withdrawal of deposits, taking this wise action before any 
considerable withdrawals had been made. Finally, the 
Chicago banks for the first time in their history author- 
ized on July 26 the issue of clearing-house loan certificates. 

SUSPENSION OF PAYMENTS. 

While the general situation was thus on the whole such 
as to give ground for hope of improvement, there was 

« More gold would have arrived during the month if the banks had 
adopted a liberal loan policy, enabling exchange dealers to purchase com- 
mercial bills more freely and to finance the gold while in transit. (See 
p. 191.) 

180 



Crises Under National Banking System 

one further serious element of weakness in the situation. 
When the withdrawals from New York began in June, 
the banks were well above reserve requirements, having 
a surplus of over $24,000,000. At the beginning of the 
second period of strain they were slightly below reserve 
requirements, and the bank statement of August 5 found 
them with a reserve deficit of $14,017,000. During the 
week the banks had lost $12,000,000 in reserve and had 
slightly increased loans by $2,200,000. This statement 
of average conditions probably represents something like 
the actual situation of the banks on Tuesday or Wednes- 
day, when the banks resorted to suspension. 

Two reasons may be advanced for this action. It may 
have been thought that a further depletion in the reserve 
might cause general loss of confidence in the New York 
banks, but this is a superficial reason at best. There is 
no evidence that depositors had become distrustful of 
the banks, and had this been feared the banks might 
have adopted the expedient resorted to in 1873 — the dis- 
continuance of the publication of the bank statement 
altogether. The real reason for suspension was that 
which was pointed out in the report of the clearing-house 
committee of 1873. The drain had not fallen equally 
upon the banks. We have no means of knowing the 
exact position of the few large banks which held the bulk 
of bankers' deposits at this time, but there can be no 
doubt that they must have suffered a far more serious 
loss of reserve than that of the banks taken as a whole.** 

a The last statement of condition of the individual banks appeared on 
June 10. The subject is considered at greater length in connection with 
the crisis of 1907, for which the available data are more complete. (See 
p. 266.) 

181 



National M on et ar y Commission 

Suspension was at no time complete, and in explaining 
its extent bankers gave indirect but convincing evidence 
that the deficiency in the reserves of particular banks 
rather than a small total reserve was the cause of the 
restriction of cash payments. It was stated that the 
banks were continuing to ship currency to interior insti- 
tutions drawing upon their cash balances, and that refusal 
applied only to the payment upon drafts remitted to them 
in the course of current business dealings. These drafts, 
it was pointed out, did not enable the banks to secure money 
from the banks on which they were drawn, since a bank 
when it had a favorable clearing-house balance could only 
get loan certificates. This was indeed true. During July 
78 per cent of the balances between the banks were settled 
with the certificates, and in August 95 per cent. Doubt- 
less during the weeks of most acute strain, in the latter part 
of July, virtually all balances were settled in this way. 

Here we find the connection between the issue of clearing- 
house loan certificates and suspension. A bank which 
received many drafts could not pay out cash indefinitely 
if it was unable to secure any money from the banks on 
which the drafts were drawn. While only a few banks 
were taking out certificates and the bulk of payments was 
made in money, no difficulty was experienced; but as 
soon as all the banks made use of that medium, the sus- 
pension of the banks which had large numbers of corre- 
respondents soon became inevitable. The further con- 
tention of bankers that they had not suspended since 
they had only refused to honor drafts was untenable. 
The clearing-house loan certificate was a device which the 



Crises Under National Banking System 

banks themselves had adopted and they had failed to 
provide any means for preventing its use leading to 
partial suspension. The contention of some bankers that 
they had suspended because they had no money to pay 
out was doubtless true of a few banks, but for that very 
reason other banks must have been all the stronger, 
probably well above their required reserve. 

That the arrangement for equalizing the reserves 
adopted in 1873 would in this instance have availed to 
prevent suspension is highly probable, indeed, a practical 
certainty. Events proved that the banks had main- 
tained payments up to the very last of the succession of 
disasters with the results of which they had been contend- 
ing. During August the number of bank failures was not 
large and none of them was of great importance. We 
can not, of course, know how soon money would have 
begun to flow back to New York, but certainly the sus- 
pension of payments could hardly have hastened the 
movement. From the beginning of September the re- 
ported movements of currency showed a gain for the New 
York banks and for the week ending September 16 the 
gain was no less than $8,000,000. One month more of 
drain, therefore, was the most that the banks would have 
been obliged to endure, and for the needs of that month 
the banks would not, as in 1873, have been confined to 
the single resource of the $79,000,000 of cash on hand. 
Gold in quantity had been engaged prior to suspension 
and continued to come in thereafter, the total gold 
imports between the first of August and the middle of 
September reaching the unexampled amount of more than 



183 



National Monetary Commission 

$40,000,000. How far this movement was due to sus- 
pension and the currency premium will be discussed in 
subsequent pages. '^ All authorities agree that much of 
the gold would have been secured in any case, and there 
is ground for the opinion that the amount sent was inde- 
pendent of suspension altogether. Still another influence 
upon the money supply should be noted. The banks had 
begun to take the necessary steps to secure additional 
bank-note circulation. The addition to the money supply 
thus secured was, of course, widely diffused among the 
banks of the country, but to some extent it served to 
diminish the withdrawals of funds from the money cen- 
ters. The gain from this source was small, but still it was 
a gain — $5,000,000 in July and $15,000,000 in August — 
and it might have been considerably greater if the large 
New York banks holding bankers' deposits had chosen to 
take out circulation to anything like the amount their capi- 
tal permitted. Finally, excess Treasury payments added 
$9,000,000 to the money in circulation during the month 
of August. From all these various sources, together with 
the continued silver purchases, the money in circulation, 
that is, in use and in the banks, increased $17,000,000 in 
July and nearly $70,000,000 in August. 

Although the banks probably held less money at the 
end than at the beginning of the period, it is evident that 
they were not obliged to meet the situation with such 
rigid cash reserves as to have made the continuance of 
payments an obviously hopeless endeavor. 

o See p. 191. 



184 



Crises Under National Banking System 

The probability that the equalization of reserves 
would have served to prevent suspension in 1893 brings 
up the question whether the banks might have been rea- 
sonably expected to resort to the arrangement in this 
emergency. At first sight it seems unreasonable to 
expect banks which reap no advantage from bankers' 
deposits to employ their reserves to meet needs with 
which they are not directly concerned. On the other 
hand, all the banks agree upon and benefit by the use of 
the clearing-house loan certificate. It is a device which 
enables the banks to meet the demand for loans, and as 
the loans of the New York banks are principally to local 
borrowers it is the local situation that is thus relieved. 
This is the proper policy for banks in any community, 
but it should not be carried out at the cost of the rest 
of the country or be allowed to overshadow all other 
responsibilities. The continuance of loans enables the 
banks to escape almost inevitable loss from failures of 
customers through the sudden contraction of credit, and 
also enables them to earn profits for their shareholders. 
Individually all the New York banks reap an advantage 
not only from the clearing-house loan certificate but also 
from the position of New York as the money center of 
the country; and anything which undermines its reputa- 
tion for strength is harmful to all. Finally, profits are not 
sacrificed when reserves are equalized, as the reserve is 
not a source of profit; it is a foundation of credit and a 
resource for emergencies. The use of a reserve does not 
in any way reduce the gains of a bank from its loans or 
other profitable operations. The objection to equalization 



185 



National M on et ar y Commission 

is simply the natural objection to assisting those who should 
have assisted themselves; it rests upon a sound basis of 
human experience, but it does not follow that the refusal 
to cooperate must be absolute. It may be conditional 
upon amendment. This was the attitude of the more 
conservative banks in 1873, but, as often happens, 
their hopes of amendment were not realized. They pro- 
posed an indirect remedy, the prohibition of the payment 
of interest on bankers' deposits. A more direct remedy 
would be secured through the insistence, by clearing-house 
authorities and the pubHc, that banks holding these 
highly explosive bankers' deposits should hold larger 
reserves in normal times than are held by the banks car- 
rying on a purely local business. 

The value of large reserves was clearly shown in the 
second stage of this crisis. At the beginning of June the 
large banks were unusually strong in reserve, and they 
were able to withstand the strain which followed the 
first series of bank failures. Had their reserves been 
somewhat larger, so as to have enabled them to go on for 
a very few weeks more, it is highly probable that even 
without equalization suspension would not have occurred. 

THE CURRENCY PREMIUM. 

The banks were not able for any length of time to con- 
fine suspension within the narrow limits of a refusal to 
honor drafts with cash payments. A beginning once 
made, they found themselves confronted with a situation 
which compelled more complete suspension. Currency 
went to a premium, and thereupon money was withheld 
by many depositors whose business brought to them a 

186 



Crises Under National Banking System 

constant stream of money. Moreover, depositors of the 
"baser" sort began to withdraw, upon various pretexts, 
larger amounts of money than were needed for their normal 
requirements, in order to secure the profit from their sale. 
The following table presents the highest and lowest quo- 
tations at which purchases were made by brokers, and 
also similar quotations of sales by them during each day 
throughout the period of the continuance of the currency 
premium : 

The currency premium. 



Aug. 3- 

4- 

s- 
7- 
8. 
9- 



25- 
26. 
a8. 
29- 
30- 
31- 
Sept. I - 



Buying 
rates. 



H to I 

Vi to I 

I 

^ to 2 

^ t0 3 

3 

! to 3 



I to 1 14 

I to I J^ 

I Vi 

I 14 to 2 'A 

3 
I 54 to 2 J4 
I J-i to 2 

'A 



W 



Selling 
rates. 



3 to 3 'A 



4 

3 

2'A 

3 

3 

2A 

3 

3 

4 

2H 

2A 

2H 



1 A to 

2 to 

1 A to 

2 to 



1 J4 to 2 



lA 

I'A 
H 
A 
A 



A to 
A to 



oGoId A to 2. 
6 Gold I A. 



c Gold I A ■ 

«* Premium reported practically disappeared. 



6158—10 13 



187 



National Monetary Commission 

This table may be taken as indicating with a fair degree 
of exactness the general course of the currency premium; 
but it is probable that purchases and sales were made on 
some days above or below the rates given. There were 
of course no ofhcial quotations, and somewhat different 
rates were found on some days in the two journals (New 
York Evening Post and the New York Tribune) from 
which the table was made up.*^ Rates were regularly 
higher for small bills than for other kinds of money and 
the purchase price of gold was subject to especially wide 
fluctuations, because it was received irregularly and in 
large quantities, on the particular da3^s of the arrival of 
European steamers. The premium continued for thirty 
days, contrasting with twenty-eight days in 1873. The 
range of quotations was similar in the two years but 
rates continued upon a high level for a longer period of 
time in 1893, rates of i per cent or more being quoted for 
sixteen days in 1873 and for twenty-three days in 1893, 
and above 2 per cent on only eight days in the first 
instance and twenty-one days in the second. 

During the first ten days of the currency premium 
interior banks were reported to have been large pur- 
chasers. Then the premium declined, owing to a smaller 
demand which was confined largely to those requiring 
money for pay-roll purposes. On August 19 the premium 
again rose to its maximum point of 4 per cent in con- 
sequence of the renewal of purchases by banks. 

o- The Commercial and Financial Chronicle mentions 5 per cent as having 
been paid for currency, but does not give the exact date. (See issue of 
Aug. 12, 1893, p. 232.) 



188 



Crises Under National Banking System 

The reported movements of currency between the New 
York banks and the interior, and the condition of the 
banks as shown by the weekly statements, do not help 
greatly in interpreting the fluctuations in the premium, 
but they do serve to explain its sudden disappearance 
at the beginning of September. During each of the first 
two weeks of August there were net shipments of money 
to the interior of a little more than $5,000,000, and for 
the third week $6,000,000; for the last week of the month, 
$2,000,000; and for the week ending September 2, less 
than $1,000,000." In the following week there was a 
slight gain for the New York banks, which was the be- 
ginning of a long-continued movement of funds to the 
city. The reserves of the banks were reduced by 
$2,700,000 for the week ending August 12, but there was 
an increase in loans largely made for facilitating gold 
imports. Deposits were reduced but slightly and the 
reserve deficit was then $16,545,000, and the ratio of 
reserve to deposit liabilities was 20.55 P^r cent. During 
the following week the reserve was increased $8,400,000. 
There was a slight reduction in loans and the reserve 
deficit was reduced to $12,000,000. During the two fol- 
lowing weeks to September 2 the reserve increased 
$12,000,000, loans were reduced by $6,000,000, and the 
reserve deficit was brought down to $1,500,000. The 
next week the statement showed a surplus reserve of 
nearly $3,000,000, and as it was based on rising averages 

o The reported movements of currency are not official, and do not provide 
any evidence of the extent to which the banks supphed correspondents 
with funds, because a part of the amount reported was currency purchased 
at a premium for outside banks. 



189 



National M on et ai' y Commission 



we may be certain that at the beginning of this week 
the banks had acquired at least the 25 per cent reserve. 
They then removed all restrictions upon payments, thus 
bringing about the disappearance of the currency pre- 
mium. Whatever excuses may be made for suspension it 
was wholly without good cause that the banks persisted in 
this policy while their reserves were increasing in the rapid 
fashion which marked the last two weeks of August. 

In 1873 the currency premium was of short duration, 
because the New York banks continued to meet all de- 
mands of banking correspondents and thus maintained 
confidence until the natural return flow of money served 
to build up depleted reser^-es. In 1893 the response to 
demands for currency by interior institutions was less 
complete, '^ and the restoration of reserves was secured 
in another way — by enormous gold imports. During the 
four weeks ending September 2 over $40,000,000 of gold 
was imported to New York from Europe. These imports 

a The bank statement for the week ending August 19 showed an increase 
of $4,000,000 in the reserve held. If allowance is made for the effect of 
the average method, it seems probable that the banks did not allow their 
reserves to decHne at all after cash payments were restricted. The follow- 
ing table shows the changes in the condition of the banks just before and 
during suspension: 



Net 
deposits. 



Reserve 
deficit. 



July 29 
Aug. 5 

13 
19 
26 

Sept. 2_ 
9. 



$406, 500, 000 
408, 700, 000 
411, 800, 000 
406, 500, 000 
403, 600, 000 
400. 200, 000 
397, 000. 000 



$382, 200. 000 
372, 900, 000 
372, 200, 000 
370. 300, 000 
370, 500, 000 
374, 000. 000 
373 , 800, 000 



?9I. 200, 000 
79, 200, 000 
76, 500, 000 
80, 500. 000 
8s, 900, 000 
91, 900, 000 
96, 400, 000 



S>4, 300. 000 
14. 000, 000 
16. soo. 000 
12, 000, 000 
6, 700, 000 
I , 600, 000 
a 3, 000, 000 



o Surplus. 
190 



Crises Under National Banking System 

greatly exceeded the amount of money which was sent 
from New York to the rest of the country and explain 
the rapid increase in reserves of the banks during the 
period of the currency premium. 

THE CAUSES OF GOLD IMPORTS. 

The enormous influx of gold established a strong prima 
facie case for the influence of the currency premium upon 
the movement. Moreover, practically no gold was engaged 
for import after the disappearance of the currency pre- 
mium, the gold which was received during the latter part 
of the month being largely for special purposes, such as the 
$1,200,000 which arrived on September 20 in transit to 
the West Indies. Finally, during the entire continuance 
of suspension exchange rates were far above the normal 
gold import point and at times even above the export 
point. On the other hand at least $14,000,000 was en- 
gaged before there was any cturency premium and 
throughout the month real bills provided a large part of 
the means for securing the gold that was imported. 
Dtiring July and August merchandise exports exceeded 
imports by more than $21,000,000 contrasted with an 
excess of imports of $13,000,000 during the same period 
in 1892. European purchases of securities at the end of 
July and during much of August also provided a large 
amount of sight exchange. In continuing exchange deal- 
ings and seciiring gold imports through these bills the 
extension of loans by the banks was essential. The proc- 
ess was thus described: 

The clearing-house loan committee have issued $9,300,000 loan certifi- 
cates this week, and the amount now outstanding is $34,550,000. A large 
proportion of these new certificates have been issued to aid the foreign 

191 



National Monetary Commission 

bankers in importing gold. The bankers deposit collateral with their 
banks and borrow the money on the security for a fixed period at an agreed- 
upon rate. The bank obtains loan certificates against this collateral and 
when the gold arrives the loan will be repaid, the collateral released, and 
the certificates canceled." 

Some gold was secured before suspension through 
sterhng loans in London, and it is only to the extent that 
the amount of such loans was increased by suspension 
over what would otherwise have been made that the 
currency premium was a factor in the movement of gold. 
The conditions of this problem can be stated, although 
no definite answer can be given. Before suspension 
higher interest rates in New York than in London made 
the negotiation of sterling loans profitable, though the 
operation was subject to possible loss, since exchange rates 
were low and might advance before the maturity of the 
bills. The difference in lending rates between New York 
and London was favorable to such dealings throughout 
July and August, but the successive advances in the Bank 
of England rate between August 3 and August 24 from 
2^ to 5 per cent, while the money stringency was dimin- 
ishing in New York, tended to reduce this advantage. 
With the appearance of the currency premium the imme- 
diate profits of importers on gold previously engaged were 
large, and this unexpected profit stimulated arrangements 
for further shipments through sterling loans. But ex- 
change rates also advanced, and were within a week at 
the gold export point, thus offsetting a part of the profit 
from the operation. A premium of at least i per cent was 
then necessary to give the importers the ordinary profit 
from the transaction. During the greater part of the 

"The Commercial and Financial Chronicle, August 5, 1893, p. 196. 

192 



Crises Under National Banking System 

month the pubHshed quotations were above this point, 
but after gold came in quantity it seems to have been 
difficult to secure sales at these terms. Moreover, the 
importer had to take account of a possible fall or dis- 
appearance of the premium. He might sell the gold for 
delivery on arrival, but this was an arrangemxent which 
was not at all times possible. Finally, suspension seems 
to have caused some diminution in the volume of real 
bills, since it interrupted somewhat the movements of 
grain and cotton. The problem of the influence of the 
currency premium is obviously, therefore, one of extreme 
complexity, regarding which it is probable that opinions of 
exchange experts at the time would have been widely at 
variance. Upon the whole it would seem safe to conclude 
that the currency premium was only an influence of 
minor importance in bringing about the gold movement. 
The following extracts from the weekly review of the 
foreign exchange market, taken from the Commercial and 
Financial Chronicle, while they may not enable the reader 
to follow the course of exchange, will serve to illustrate 
the great complexity of the influences at work: 

Our foreign exchange market was unsettled early in the week, lower on 
Wednesday, and firmer at the close. The offerings were largely from the 
arbitrage houses, with a fair supply of commercial bills, but there was a 
steady demand to remit for prospective imports of gold, which caused a 
reaction on Thursday, and long sterling was then affected by the advance 
in the discount rate in London. o 

Our foreign exchange market has been almost entirely dominated this 
week by the premium on gold in transit and by the advance in the open 
market and the official discount rate in London. The premium upon gold 
enhanced the value of the metal in New York, so as to make possible, if not 
profitable, the import of gold. This was true, although on Thursday rates 
for sight bills and cable transfers were not only above the normal gold- 

fl The Commercial and Financial Chronicle, August 5, 1893, p. 196. 

193 



National Monetary Commission 

importing point, but very near that at which gold has been exported. The 
premium here on gold ranged, as already stated, from 1 1^ to 2 per cent after 
Tuesday, the average being equal to about 7 to 8^ cents per pound sterling, 
but on Thursday afternoon there were indications of a smaller premium, 
and yesterday afternoon the best bid for gold was one-half of i per cent, 
with offerings at i per cent." 

Foreign exchange has been unsettled this week by the varying premiums 
for gold and currency, and on Tuesday and Wednesday there were frequent 
changes by some of the leading drawers. The market was also influenced 
by dearer discounts in London, which indicated a possil)le advance in the 
bank minimum. Commercial bills have been scarce, the movement of 
cotton and grain being interrupted by the stringency in money, and arbi- 
trage operations have had little or no effect. On Thursday it was stated 
that bids could not be obtained for gold for gold to arrive within ten days, 
but the bidding was chiefly for gold on the spot, and i}4 per cent and upward 
was paid for such metal. Those who were importing generally had gold on 
hand, which they sold at the ruling premium, and the profit enabled further 
speculative importations to be made & * 

Our foreign exchange market has again tended downward, chiefly by 
reason of the varying premium on gold on the spot and to arrive; other 
influences operating have been the renewal of sterling loans, the dearer 
discount rate in London, and fairly liberal supplies of commercial bills 
drawn against grain exports. The market was firm on Monday, unsettled 
and lower on Tuesday, active, closing easier, on Wednesday, and dull and 
steady on Thursday, with short rates affected by the advance in the Bank 
of England rates of discount . c 

Our foreign exchange market was firm on Monday although business 
was light. On the following day the tone was easier in consequence of 
the absence of a premium for spot gold, and the market was also influ- 
enced bv offerings of commercial bills against grain and provisions, and 
on Wednesday there was a good supply of drafts against securities bought 
for London and Amsterdam account. The market was dull and steady 
on Thursday and slightly influenced by easier discounts in London. <* 

One further result of the currency premium was the 
direct importation of gold by interior banks, especially 
by those of Chicago. Instead of disposing of commercial 
bills to foreign exchange houses in New York, they were 
used to secure gold in lyondon, which was shipped di- 

« The Commercial and Financial Chronicle, August 12, 1893, p. 232. 

6 Ibid., August 19, 1893, p. 273. 

c Ibid., August 26, 1893, p. 321. 

^ Ibid., September 2, 1893, pp. 356-357. 

194 



Crises Under National Banking System 

rectly to the various banks engaging in the operation. 
Had the usual practice been followed, the banks would 
have simply increased their unavailable balances in New 
York. It is obvious that this had no effect upon the ag- 
gregate amount of gold sent to the United States. 

SUSPENSION AND HOARDING. 

As in the case of gold imports, the effect of the pre- 
mium on currency upon the domestic money supply can 
not be determined exactly. There were reports of money 
being brought to brokers which had obviously been kept 
by its owners for a long time before the outbreak of the 
crisis and also of money which had been probably with- 
drawn from banks by frightened depositors. But as 
early as August i6 '^ it was reported by brokers that 
they were no longer getting hoarded money, but were pur- 
chasing from retail shopkeepers and from persons who 
had succeeded in extracting money from the banks. A 
suspicious increase in the amount of money which small 
clothing manufacturers asked for, ostensibly for payroll 
purposes, was observed at certain of the New York banks. 
More generally it was found that depositors were not 
paying into their banks customary amounts of currency. 

While it is possible, though not probable, that the cur- 
rency premium increased the domestic money supply,'' it 
is certain that it vastly increased the amount of money 
required for a given volume of transactions. Evidence 
for this conclusion is found in the apparent dearth of 

« See New York Evening Post, August i6, 1S93. 

& It was estimated that not more than $15,000,000 was purchased dur- 
ing the continuance of the premium. (See p. 426.) 



195 



National M on et ar y Commission 

money which followed immediately the announcement 
that banks had restricted payments. The serious sig- 
nificance of the premium on currency was not at first 
clearly recognized. Upon its first appearance it was ob- 
served in the Chronicle: 

A little incident of the week, typical of the times, has been the effort to 
establish a premium on small note currency. We do not look upon the 
effort as important; how far the transactions have been made for effect 
and how far they are real it would be difficult to say.« 

A week later the subject is treated in a fashion which 
is in amusing contrast: 

Other than the President's message and the meeting of Congress, which 
we have remarked upon in a subsequent column, the premium on gold 
and currency that has prevailed has been the important topic. This fea- 
ture in the situation we referred to last week when it had developed only 
very moderate proportions. From that beginning, however, the demand 
for currency gradually grew more urgent, the premium rising as high even 
as 5 per cent, disclosing a marked scarcity of currency, not alone in this 
city but very noticeable at Philadelphia and Boston in the East and Chi- 
cago and other centers in the West. All kinds of currency were in re- 
quest, including even standard silver dollars. Foreign bankers also report 
that 1% to 2 per cent was paid for gold to arrive. Of course, the gold 
import movement had been affected by these operations, which in turn 
have raised foreign exchange rates materially, since the premium paid 
raises the power of exchange and consequently the point at which gold 
can be imported at a profit. Thursday, however, there were decided indi- 
cations that the transactions in currency had culminated. On that day 
the supply was increased by large offerings and the demand slackened. 
Yesterday the same conditions continued to prevail, and the premium on 
currency dropped to i% and 2 per cent.& 

Suspension in New York had necessarily involved sus- 
pension throughout the country, and thereupon the 
dearth of money became the most striking feature of the 
crisis, one which came home directly to the mass of the 
people and which was remembered long after the exact 

« Commercial and Financial Chronicle, August 5, 1893, p. 196. 
6 Ibid., August 12, 1893, p. 232. 



196 



Crises Under National Banking System 

course of the crisis had been forgotten. Few observers 
seem to have perceived that the dearth of money was a 
consequence and not a cause of suspension, with the result 
that power to issue notes in large quantities has become 
the accepted panacea for meeting the difficulties with 
which banks are confronted during emergencies. It was 
estimated that something like $300,000,000 in money and 
substitutes for money were added to the supply outside 
the banks during August, and it was, therefore, urged 
that it was necessary to give the banks power to issue 
notes to something like that amount in order to enable 
them to cope with similar situations in the future. Not 
having this power, it was also generally felt that suspen- 
sion by the banks was unavoidable and due to no fault 
on their part. 

Moreover, estimates of money requirements during this 
crisis were very greatly exaggerated. In a pamphlet 
published and widely circulated by the Sound Currency 
Committee of the Reform Club it was assumed that the 
reduction of about $200,000,000 in the deposits of the 
national banks between May and July represented with- 
drawals of cash. We have already seen that the decline 
in deposits was due principally to loan contraction and to 
the withdrawal of money from reserve agents, and only 
to an insignificant extent was it a result of the withdrawal 
of money from the banks. In the second place, issues of 
clearing-house loan certificates were frequently regarded as 
an addition to the circulating medium. The maximum 
amount of the certificates in the United States at any one 
time was probably in the neighborhood of $60,000,000; 
but they were simply loans between banks, and had all the 

197 



National Monetary Commission 

certificates been retired there would not have been a penny- 
less in the banks taken as a whole. To some extent their 
use might have enabled the banks to pay out more cash 
from their reserves than they otherwise might have been 
disposed to relinquish, but as they resorted to suspension 
before reserves were seriously depleted, even this possi- 
bility was not realized. 

Various substitutes for money were utilized to meet 
the situation which the banks had brought about by 
refusing to use their own stores of cash. Clearing-house 
certificates (not clearing-house loan certificates) were 
issued in many towns, especially in the Southeastern 
States. Cashiers' checks in convenient denominations 
seem to have been used in all parts of the country. In 
factory towns pay checks became an acceptable part of 
the circulating medium." 

Some hoarding had certainly taken place before the 
beginning of August, but it was largely confined to those 
parts of the South and West where there had been numer- 
ous bank failures and suspensions. The disappearance of 
money after the beginning of August can not properly be 
characterized as hoarding. People naturally refrain from 
paying money into the banks after the banks have begun 
to place restrictions upon its withdrawal. The various 
substitutes for money served in a measure to take the 
place of money which would have moved into, and out of 
the banks in ordinary course had they not resorted to 
suspension. 

o For an account of these and other substitutes for money see The Cur- 
rency Famine of 1893, by J. DeWitt Warner, in Sound Currency, vol. 2, 
No. 6, and in Sound Currency Year Book, 1896, pp. 341 to 356. 

198 



Crises Under National Banking System 

The following extract, taken from the pamphlet already 
referred to, is entirely accurate as to the course of events, 
but places the cart directly before the horse in its explana- 
tion of the phenomena: 

Then developed the feature that will forever characterize the stringency 
of 1893 — instructive to those who have not already learned how immaterial 
is any ordinary supply of legal currency when compared with credit in its 
various forms — the real currency of the country. * * * Almost between 
morning and night the scramble for currency had begun and culminated 
all over the country, and the preposterous bulk of our circulating medium 
had been swallowed up as effectually as, in a scarcely less brief period, gold 
and silver had disappeared before the premiun on specie a generation 
before. Currency was hoarded until it became so scarce that it had to be 
bought as merchandise at a premium of i to 3 per cent in checks payable 
through the clearing house; and to enable their families to meet petty 
bills at the summer resorts the merchants and professional men of the 
cities were forced to purchase and send by express packages of bills or 
coin; while savings banks hawked their government bond investments 
about the money centers in a vain effort to secure currency. a 

THE EFFECT OF SUSPENSION ON TRADE. 

The effect of suspension upon the trade of the country 
was similar to that which was analyzed in the case of the 
crisis of 1873, though in some respects the general eco- 
nomic situation was different. In 1873 the banks re- 
stricted payments almost at the beginning of the disturb- 
ance, while in 1893 that step was taken only after some 
months of struggle with adverse circumstances. In 1873 
suspension was one of the initial causes interrupting the 
normal course of business. In 1893 it was rather of the 
nature of a last straw added to the burdens resting on the 
business community. It is not possible, therefore, to 
determine with any degree of accuracy the relative effects 

a The Currency Famine of 1893, by J. DeWitt Warner, in Sound Cur- 
rency, vol. 2, No. 6, and in Sound Currency Year Book, 1896, p. 340. 



199 



'National Monetary Commission 

of suspension during these two crises. Mercantile failures 
and the curtailment of production had marked the course 
of previous months. '^ And even if the banks had main- 
tained payments, it is reasonably certain that August 
would have witnessed further decline in general business 
activities. Moreover, partial general suspension may 
have enabled some banks which might have failed or 
suspended completely to escape those misfortunes. It is 
also possible that more drastic loan contraction would 
have been enforced by the banks if they had been 
exerting every effort to maintain cash payments. 

There is, however, evidence that suspension was a 
potent factor accentuating the depression in trade which 
characterized the month of August. It increased the 
general feeling of distrust which, as always in a crisis, does 
so much to bring about greater inactivity than the actual 
condition of affairs warrants. A more definite conse- 
quence was the difficulty in securing money for pay rolls, 
which led to the temporary shutting down of many fac- 
tories. Finally, it deranged the exchanges between differ- 
ent parts of the country, causing a slackening in the 
movement of commodities and needless delays in collec- 
'tions which were already slow on account of the general 
situation. 

The preponderant result of these various influences was 
certainly unfavorable. Perhaps the best indication is to 
be found in the returns of railway gross earnings, which 
are presented in the following table: 

oFor the effect of the crisis upon manufacturing industries before the 
beginning of August see Bradstreet's, August 12, 1893, p. 502. 



Crises Under National Banking System 



Railway gross earnings fl 



March 

April 

May 

June 

July 

August 

September 
October . _ 
November 
December - 



1895. 



56 1. 900, 
56, 000, 
6s, 000, 
S9.500, 
S6, 800, 
54. 700, 
58, 200, 
64, 000, 
56. 700, 
48, 000, 



000 
000 
000 
000 
000 
000 
000 
000 
000 
000 



S58. 700, 
54. 100, 
60, 300, 
57. 800, 
59. 700, 
63, 100, 
64, 900, 
67, 400. 
63, 100, 
56, 300. 



000 
000 
000 
000 
000 
000 
000 
000 
000 
000 



Per cent in- 
crease ( + ) or 
decrease ( — ). 



+ 5 
+ 3 
+ 7 
+ 2 

— 4 

— 13 



It will be observed that the crisis did not cause a fall- 
ing off in earnings until July. The loss of nearly 5 per 
cent in that month was followed by one of more than 13 
per cent in August. Doubtless the loss for the latter 
part of July was considerably greater than that for the 
month taken as a whole. But when every allowance has 
been made there can be no question that the greater 
loss in August earnings reflects a far more unsatisfactory 
volume of trade during that month. The September 
returns showed some improvement over the previous 
month, as did also those of October, but the percentage 
of loss in earnings increased once more in November and 
was at the highest point of the year in December. The 
December return was, aside from the fact of one less 
working day, an indication of the long period of trade 
depression which was to follow. Much of the decline in 
August, with* the subsequent partial recovery, can only be 
ascribed to the trade paralysis produced by the financial 



oThe Commercial and Financial Chronicle, February 25, 1894, P- 328. 



National M on et ar y Commission 

situation at that time. The situation was described as 
follows in the Chronicle: 

The month of August wiU long remain memorable as one of the most 
remarkable in our industrial history. Never before has there been such a 
sudden and striking cessation of industrial activity. Nor was any section 
of the country exempt from the paralysis; mills, factories, furnaces, mines 
nearly everywhere shut down in large numbers, and commerce and enter- 
prise were arrested in an extraordinary and unprecedented degree. The 
complete unsettlement of confidence and the derangement of our financial 
machinery, which made it almost impossible to obtain loans or sell domes- 
tic exchange and which put money to a premium over checks, had the 
eiTect of stopping the wheels of industry and of contracting production 
and consumption within the narrowest limits, so that our internal trade 
was reduced to very small proportions — in fact, was brought almost to a 
standstill — and hundreds of thousands of men thrown out of employment-^ 

Another indication of the course of trade was furnished 
by the figures of clearing-house transactions, not includ- 
ing New York, where financial operations are a predomi- 
nant factor. These returns show a loss for June of lo 
per cent, of 15 per cent for July, and of no less than 29.8 
per cent for August. During the succeeding three 
months there was some improvement, followed by a 
further decline, as in the case of railway earnings in 
December. 

During July the newspapers had contained many re- 
ports of the closing of factories on account of failures, 
inability to make collections, or to procure credits from 
the banks. In August these causes were mentioned in 
some instances, but the most frequently assigned cause 
of the shutting down of factories was inability to procure 
money for pay rolls. The impression derived from an 
examination of contemporary journals is that this diffi- 
culty was more general and more severely felt than in 

"The Commercial and Financial Chronicle, September 16, 1893, p. 446. 



Crises Under National Banking System 

1873. But there are reasons which render such a con- 
clusion far from certain, and even less certain the con- 
clusion that the banks restricted payments more gen- 
erally. The number of factories had of course greatly 
increased during the interval between the two crises, and 
it is also probable that the news service had become more 
complete. The weekly payment of wages had become 
more general, thus increasing the requirements of em- 
ployers. Finally, the resort to various substitutes for 
money, which w^as far more general in 1893, may indicate 
more general restriction of payments by the banks; but, 
on the other hand, it may simply mean that employers 
had found a way out of the difficulty. Inability to se- 
cure currency certainly did not continue through an 
appreciably longer interval in 1893 than in 1873. As 
early as August 18 reports of the reopening of factories 
began to appear in the daily journals, and though reports 
of the shutting down of factories continued for some days, 
by the end of the month the tide had turned strongly in 
the opposite direction. The banks removed the restric- 
tions upon cash payments, gradually reaching complete 
resumption early in September, and the simultaneous 
renewal of business activities affords striking evidence of 
the disturbing effect which had been brought about by 
suspension. 

THE DOMESTIC EXCHANGES. 

The domestic exchanges had been deranged at various 
points before the New York banks suspended at the 
beginning of August. In Omaha, for example, it was 
reported that "the failure of seven banks in Nebraska 

6158—10 14 203 



National M on et ar y Commission 

makes Omaha banks rather more conservative, and they 
now refuse country checks except for collection."'^ A 
little later it was reported in Philadelphia that "banks 
are husbanding currency very carefully, some of them 
having been obliged to pay $5 per 1,000 exchange on 
New York."^ After the beginning of August reports of 
difficulties of this kind became general and rates of ex- 
change on New York became almost prohibitive in many 
parts of the country. The following table, compiled from 
Bradstreet's, shows the course of exchange on New York 
at a number of important points throughout the country 
between July 29 and September 9, 1893: 





Boston. 


Philadelphia. 


Julj' 29 - . . 


35 to 45 cents discount 


$10 premium. 

$10 premium. 

idio to gi5 discount. 

$15 to ^20 discount. 

$8.75 discount. 

75 cents to $1 premium. 

so cents premium. 


Aug. s 


12 




19 




26 


90 cents to $1 premium 

IS to 20 cents premium 


Sept. 2 _ 


9 


20 to 25 cents discount 




Chicago. 


St. Louis. 


July 29 


5553 discount 


$3 discount. 
$4-25 discount. 
$7.50 discount. 
$7.50 discount. 
$4 discount. 
Par 


Aug. 5.- 




12 


$25 to $30 discount 


19 


5? 1 5 discount- - 


26_.- 


$5 discount 


Sept. 2 . 




9 . 




90 cents premium. 







o Bradstreet's, July 8, 1893, p. 431. 
6 Bradstreet's, July 22, 1893. 



204 



Crises Under National Banking System 



July 29. 
Aug. 5- 

12. 

19- 

26. 
Sept. 2. 

9- 



50 cents discount. 
$1 discount. 

to $5 discount. 
JS3 to $6 discount . 
$S discount - 
Par to so cents discount. 
Par. 



Kansas City. 



$1.75 discount. 

$1.50 discount. 

$2 discount. 

$i discount. 

$i discount. 

Par. 

SO cents premium. 





Minneapolis. 


New Orleans. 






Par. 






$1.50 discount. 










$S discount. 


26 ... 




Sept. 2 






9. 


Par 












Charleston. 


San Francisco. 




%i.2$ premium 


$3.50 premium. 


Aug. 5 








75 cents discount. 
$1.25 premium. 
Par. 






26 


JSio to $15 discount 

$10 to $13 discount 


Sept. 2 


!5i.2S premium. 
$3 premium. 


y 







An analysis of the various influences which affect 
domestic exchange rates under the regime of suspension 
will be found in the chapter on the crisis of iQcy.*^ Here 
it will be sufficient to note that they were generally at 
a discount which was in most instances abnormally low. 
The most striking example was Chicago, where a rate of 
$30 per $1,000 was quoted at one time. These rates, 
however abnormal, merely indicate the dislocated condition 

o See p. 291. 



205 



National Monetary Commission 

of the domestic exchanges. They do not measure the 
extent of the dislocation and still less do they measure its 
effect upon the trade of the country. The published 
rates apply chiefly to business between banks and furnish 
no indication of the treatment which was accorded drafts 
on distant places when paid into the banks by depositors. 
Drafts were often of little or no utility to the holder 
because the banks refused to take them except at a 
ruinous discount or for collection. Exchange between 
different parts of the country, at least between the more 
important cities, does not seem to have been at any time 
completely blocked. It was, however, deranged to such 
an extent as to interfere seriously with the ordinary move- 
ment of commodities. The banking situation in general 
and the dislocation of the exchanges in particular seem to 
have been the influences which made the first two weeks 
of August the worst period of the crisis in general trade. 
The condition of affairs may be judged from the following 
extracts from Bradstreet's for the weeks ending August 5 
and 12: 

While special telegrams from many points South and West report a more 
hopeful feeling in financial and commercial circles, due to the increased 
currency issue by New York national banks, the gold afloat for the United 
States, and in the expectation that Congress will promptly repeal the com- 
pulsory purchase of silver clause of the Sherman Act, the week has, on the 
whole, brought more unfavorable features in the apparent hoarding and 
scarcity of currency East and West, the near approach of the demand for 
funds to "move the crops," the increase in the shut-down movement by 
manufacturers in New England, Middle and Central Western States, and 
the clog to trade shown by prohibitive rates for New York exchange at 
centers East, West, and Northwest. * * * Chicago packers and grain 
shippers selling to interior eastern points, having been unable to sell their 
New York exchange, are ordering the currency to pay for stuff shipped 
direct by express, thus doing away with banks. At New York credit of both 
banks and commercial interests is unimpaired, but actual money is scarce 

206 



Crises Under National Banking System 

and commands a premium. The arrival of gold in transit is expected to 
clear the atmosphere and relieve pressure. Demands for actual currency 
from all quarters on New York are pressing. The scarcity of small notes 
and silver dollars is a feature. Banks are generally refusing or complying 
only partially with requests for large sums. * * * 

Money remains stringent at Boston, Hartford, Providence, and Phila- 
delphia, with a depressing effect on business. There is a smaller volume 
of orders being received at Baltimore, and banks are not meeting the out of 
town demand for currency. Currency is scarce at Pittsburg also, but at 
Buffalo banks are refusing to ship currency west, while having sufficient 
for local demand. Trade there is dull, and savings banks profess not to 
need the sixty-day rule. " 

The irrational but widespread hoarding of currency has compelled job- 
bers and manufacttirers in many instances to do business more nearly 
than ever on a cash basis, which has resulted in a further restriction of 
trade throughout the country. This is accompanied by such signs of 
aggravation as increased difficulty in disposing of commercial paper, a 
still greater scarcity of currency at larger centers, and a shut-down move- 
ment among industrial establishments; the latter, together with curtail- 
ment of forces in that and in commercial lines, points to the enforced idle- 
ness of nearly i ,000,000 wage-earners within the past two months, as com- 
pared with not more than 400,000 at the close of 1884, the previous year 
of greatest business depression. The week's bank clearings total is the 
smallest of recent years — $802,000,000 — 17 per cent less than last week 
and 20 per cent less than in the week of 1892. * * * 

A hand to mouth demand for staples is reported from Boston; many 
leading industries have shut down, currency is scarcer, commercial paper 
is ignored, and general business rather more clogged than last week, all of 
which applies as well to New York, Philadelphia, Baltimore, and Pittsburg. 

Philadelphia banks request customers to stamp checks "payable through 
the clearing house." Baltimore distillers experience difficulty in getting 
currency to buy revenue stamps, while jobbers there report salesmen 
returning, owing to lack of orders. Pittsburg hopes for greater ease in 
its local money market, now that the clearing house will issue certifi- 
cates. At Buffalo banks continue to pursue a very cautious policy, and 
many merchants are stamping checks " payable through the clearing 
house." * * * 

Increased demands from country banks make currency scarcer at Cleve- 
land and Cincinnati, where previous dullness is intensified. Business at 
Louisville is almost at a standstill, banks declining to receive country 
checks even for collection, and preferring not to handle New York ex- 
change. General trade is almost on a cash basis at Indianapolis, and 
reduced in volume, which is also true at Milwaukee. Chicago bankers are 

a Bradstreet's, August 5, 1893, p. 495. 
207 



National M o n et ar y Commission 

hopeful, owing to the heavy gold importations, but orders left with jobbers 
are held awaiting crop advices, some of the latter being doubtful. St. 
Paul, Minneapolis, and Duluth jobbers are doing a hand to mouth busi- 
ness, awaiting a change in the situation. St. Louis reports a shrinkage in 
the volume of sales of dry goods and hardware, while at Omaha banking 
accommodations and the volume of trade continue in reduced volume. 
Live stock receipts are smaller, with higher prices, and the corn crop is 
damaged in western Nebraska, a 

The first faint signs of recovery were observed during 
the third week of August, and by the beginning of Sep- 
tember the reaction from extreme depression was immis- 
takable. The passage by the House of Representatives 
on August 28 of the biU repeaHng the silver purchase 
clause of the act of 1890 did much to restore confidence, 
but the restoration of banking facilities did far more to 
start the wheels of industry. The domestic exchanges 
resumed their normal course, and no further difficulty 
was experienced in securing money for pay rolls. Unfa- 
vorable banking influences which had been at work long 
before the beginning of August also disappeared. The 
banks began to make loans more freely, and though the 
total volume of loans seems to have been still further 
reduced, contraction was no longer drastic, and where 
business needs appeared loans were increased. 

Contraction in loans was perhaps the most striking 
feature of this crisis. From their maximum amount of 
$2,161,000,000 on May 4 loans of the national banks were 
reduced on July 12 to $2,020,000,000, and on October 4 to 
$1,843,000,000, a total contraction of $318,000,000, or 
more than 14.7 per cent. In 1873 loans had been reduced 
but 5 per cent, and in 1907 the reduction was only 2 per 
cent. The long period over which the financial disturbance 

« Bradstreet's, August 12, 1893, p. 511. 
208 



Crises Under National Banking System 

extended accounts in some measure for this unsatisfactory 
showing in 1893; it simply reflects in part the inevitable 
diminution in business dealings which would have taken 
place sooner or later quite apart from banking and mone- 
tary causes. It can not be questioned, however, that the 
banks in many parts of the country caused needless dam- 
age to their customers by a ruthless policy of loan contrac- 
tion. Nowhere is this more clearly evident than in Chicago, 
a central reserve city with responsibilities to the commu- 
nity at large which are not incurred by purely local banks. 
The Chicago banks reduced loans from $96,800,000 on 
May 4 to $82,400,000 on July 12, and to $73,500,000 on 
October 4. No sound reason can be given for such drastic 
contraction, but it is explained by the failure of the Chi- 
cago banks to make use of clearing-house loan certificates.^ 
They were far stronger in July than in May and had still 
further strengthened themselves in October, and there is 
no indication that they had allowed their reserve to decline 
appreciably during the interval. Each bank pursuing its 
own selfish policy, all were forced to contract loans, thus 
increasing the strain upon their own customers and in 
some measure increasing the burdens upon the banks in 
New York. 

After the beginning of September the course of the 
crisis of 1893 was no longer a banking affair. As always, 
when general trade depression sets in, the banks soon 
found themselves with an abundant supply of funds and 

a The issue of clearing house loan certificates in Chicago was authorised 
on July 26, but none v/ere taken out by the banks. After the partial sus- 
pension which came in the following week they were no longer necessary. 



209 



National Monetary Commission 

in position to lend far beyond the requirements of borrow- 
ers. On October 4 the cash reserves of the banks were 
$346,000,000, contrasted with $289,000,000 on July 12. 
At the earlier date the reserves of the banks were not at 
the low point reached in August, and the flow of money to 
the banks in September must have been far greater than 
this increase. The next return on December 19 found 
the banks with cash reserves of $414,000,000, an increase 
since July of $125,000,000. This rapid return of money 
to the banks suggests the very obvious conclusion that 
the withdrawal of money in June and July was not due 
to deep-seated doubts of the solvency of the banks in 
general, but was due rather to a temporary wave of 
distrust which might have been successfully overcome by 
a bolder policy in the use of reserves. 

NO CHANGES IN BANKING METHODS OR I,EGISI.ATlON. 

The experience derived from this crisis led to no 
changes whatever either in banking methods or in leg- 
islation. The silver question drew away men's minds 
from any consideration of the questions raised by earlier 
crises. Whether the banks through their own efforts 
might not place themselves in a better position to meet 
future emergencies does not seem to have been dis- 
cussed. Both bankers and the public seem to have been 
well satisfied with the showing made by the banks, 
especially by those of New York ; and indeed if compari- 
son be made with the policy adopted by the Chicago 
banks, the banks of the metropolis met the situation in 
a creditable fashion. 



Crises Under National Banking System 

There was, however, evidence of a willingness to adopt 
suspension in emergencies, which is in striking contrast 
to the healthy critical attitude of both bankers and the 
public in 1873. 

It is difficult to imagine a more weak and pusilani- 
mous attitude than that which found expression in the 
following passage from Bradstreet's: 

Since the present financial complications began the New York associ- 
ated banks have virtually acted as one institution in all matters of vital 
moment. The services they have rendered, not only to the business com- 
munity at New York but to the banks and commercial interests of the 
entire country, can not be overestimated. The situation has constantly 
been one of danger and difficulty, and could only be met by extraordinary 
measures. The banks here have been called on to supply funds for the 
whole country, and did so unhesitatingly until it became necessary to 
put a check upon a movement which depleted the reserves upon which the 
banking facilities of the entire United States depend. The restricting of 
the facility with which bank credits could be converted into cash served 
the purpose. It tended to make the hoarding of money expensive, and 
at the same time prevented individuals from utilizing the banks for the 
purpose of speculating in currency. It was a useful and salutary move 
and will in the end aid in bringing about a restoration of confidence and 
a normal condition of credit. Attacks upon the banks for the restriction 
thus exercised may be founded in ignorance of the real principles, but 
they tend to do a great deal of mischief and to create a state of public 
feeling which it is eminently desirable should be avoided. These consid- 
erations apply with added force to the manifestations of hostility toward 
the New York banks and their course by a certain element in Congress. 
The banks have been supporting the credit of the country and checking 
the symptoms of the panic, and ill-informed criticism upon their methods 
have no excuse at a juncture of this gravity.** 

It may, however, be observed once more that the New 
York banks had met successfully but one part of their 
responsibilities to the community. The need for larger 
reserves by the banks holding bankers' deposits or some 
method for making use of the entire store of cash held 
by the banks was just as clearly shown by the course of 

o Bradstreet's, August 26, 1893, p. 534. 



National M on et ar y Commission 

the crisis as were the good results of the liberal loan 
policy which was adopted. 

Neither the Secretary of the Treasury nor the Comp- 
troller of the Currency made any important recommen- 
dations in their annual reports which followed this crisis," 
their comparatively recent entrance into these offices 
being perhaps a sufficient reason. The Comptroller of 
the Currency contented himself with an argument backed 
up with statistics to show that the number of suspensions 
and failures among national banks was far less numerous 
than among state institutions.^ This was indeed true, 
though the statistics were in some respects not compara- 
ble, to say nothing of some special circumstances which 
accounted in a measure for the relatively poor showing 
of the state institutions.'' 

The showing made by the national banks was in any 
event far from satisfactory. There were 65 failures dur- 
ing the year; only 13 banks paid all claims in full, and 
but 9 of them were able to meet the interest obligation 
during the period of liquidation. Claims against all failed 
banks amounted to $14,434,105, and $9,778,449 was 
paid. The cause of failure and also of suspension in 

o On account of the absence of a contemporary narrative of the crisis 
in government reports, considerable portions of an article by Mr. A. D. 
Noyes have been reprinted in the Appendix. See Note I, pp. 413-427. 

& See report of the Comptroller of the Currency, 1893, p. 13. 

c The figures for the state banks included every kind of banking institu- 
tion, even private banks. Moreover, the number of state banks was 
relatively large in the West and Southwest, where failures of all kinds of 
banks were most numerous. Finally the state banks were relatively of 
small size and the mortality among the smaller banks was particularly 
great among both national and state banks. 



Crises Under National Banking- System 

some instances might probably have been removed by 
more efficient examination and more rigorous enforcement 
of the law by the Comptroller of the Currency."^ 

In later years, as we have seen, the most dramatic and 
striking episode of the crisis — the dearth of currency — 
became an important influence in directing attention 
exclusively to various devices for a less rigid system of 
note issue as a resource for future emergencies. That 
by such means' the ability of the banks to cope with crises 
would be increased is not questioned; but, after all, such 
proposals do not go to the root of the matter. Unless 
associated with more conservative management it is 
highly probable that enlarged power to issue notes would 
be used in such a fashion in the years before crises as to 
place the banks in an extremely hazardous position 
through more unrestrained extension of credit than would 
otherwise have been granted. 

While there may be room for differences of opinion as 
to the teaching of this crisis with regard to the need and 
effects of a more liberal power of note issue, in another 
direction an inference was drawn which was wholly 
without foundation and which had the most unfortunate 
effect upon the course of events in 1907. • With the lapse 
of time recollections of the exact course of the crisis 
became vague, and gradually the view seems to have be- 
come established among bankers that the issue of clear- 
ing-house loan certificates inevitably and immediately in- 
volves suspension and the currency premium. These 

a See Appendix, Note G, pp. 400-405, for a detailed account of failures 
and suspensions during 1893, taken from the Comptroller's Report for 1893. 



213 



National Monetary Commission 

aspects of the crisis were remembered, but it was for- 
gotten that certificates had been in use for six weeks 
before suspension occurred, and that 1873 was the only 
other occasion when their use had involved suspension. 
We have seen that suspension may occur when loan cer- 
tificates are being used, but there is strong ground for 
the opinion that on those occasions suspension would 
have come earlier had their issue not been authorized. 
Without the certificate each bank would most certainly 
have pursued in 1893 the policy of loan contraction, just 
as was the case in 1857. Disastrous failures among 
brokers and business houses would inevitably have fol- 
lowed; the banks would have suffered loss from the non- 
payment of loans, and doubts of their solvency would 
have been engendered with consequent runs and inevitable 
suspension. General loan contraction spells general in- 
solvency, while a relatively stable volume of loans secured 
through the use of loan certificates may or may not enable 
the banks to escape suspension. Never until 1907 did 
the issue of loan certificates and suspension come at the 
same moment, and then it was due more than anything 
else to the utterly unfounded notion that the use of the 
one had involved the other in previous emergencies." 
The issue of clearing-house loan certificates was not 
more general in 1893 than in 1873, and though the amount 
issued was greater it was not so large in proportion to the 
volume of banking business.^ The period of strain was, 

a See p. 257. 

& For an account of the issue of loan certificates in 1 893 the reader is 
referred to Note H in the Appendix containing the report of the New 
York clearing house loan committee and extracts from the Report of the 
Comptroller of the Currenc)' for 1893. See pp. 406-412 below. 

214 



Crises Under National Banking System 

however, unusually long, and consequently the use of 
the certificates in quantity was more protracted than 
on former occasions. To this may perhaps be attributed 
the weakening of the disinclination of many of the banks 
to take them out. In 1907, on the authorization of 
their issue, they were immediately taken out by practi- 
cally all the banks having to meet unfavorable balances. 
In these circumstances, as we shall see in the following 
chapter, immediate suspension became inevitable. 



215 



Chapter V. 

THE CRISIS OF 1907. 
The same elements of weakness have been miiformly 
disclosed by the analysis of the experiences of the national 
banks during successive periods of financial strain. The 
normal condition of the banks was one of lack of prepara- 
tion for emergencies. No adequate lending power or sur- 
plus cash reserve was available at any time except during 
periods of trade depression when the banks were unable to 
find borrowers for all the loans they were prepared to 
make. This unsatisfactory situation was, however, not 
clearly recognized. Minor causes of difficulty absorbed 
the attention both of bankers and of the public. It was 
felt that the banks had to work under unfavorable condi- 
tions, for the results of which they were not responsible, 
and the conclusion was generally drawn that no blame 
rested upon them. In 1873, for example, the currency 
was inconvertible and depreciated, and the banks could 
not increase their available cash reserve by the acquisition 
of gold. During the eighties and early nineties silver 
purchases weakened the monetary structure and bred dis- 
trust of American securities at home and in foreign coun- 
tries. For our purposes, therefore, we are fortunate in 
being provided with a crisis which was preceded by no 
legislation or monetary conditions unfavorable to sound 
banking. On the contrary, these influences tended to 
strengthen the banks in very definite ways. 

BANKING MOVEMENTS, 1897-1907. 

At the beginning of the ten years of business activity 
which culminated in 1907 the banks were in an exceedingly 

216 



Crises Under National Banking System 

strong condition, as is usually the case at the end of a 
long period of depression. During the four years following 
the crisis of 1893 the loans, deposits, and cash reserves of 
the banks fluctuated within narrow limits, reflecting the 
stagnant condition of trade. On October 5, 1897, against 
net deposits of $2,195,000,000 the national banks held a 
cash reserve of $388,900,000, giving them the tolerably 
high ratio of 17.7 per cent to deposit liabilities. Their 
loans also must have been of high average quality after 
four years of thoroughgoing liquidation and recuperation 
in the business world. 

Beginning with the autumn of 1897, the cash reserves 
of the banks increased rapidly. At first the gain was 
due to gold imports secured through abnormally large 
grain exports to Europe, and afterwards on account of 
increasing gold production, of which the United States 
acquired a considerable share. A further gain was se- 
cured indirectly as a result of the currency act of 1900. 
That measure made the issue of bank notes somewhat 
more profitable to the banks, and between February 13, 
1900, and August 22, 1907, bank-note circulation rose 
from $204,900,000 to $551,900,000. By this means 
nearly $350,000,000 was provided to meet the hand-to- 
hand needs of the people for money and to supply the 
reserve requirements of state banks and trust companies. 
The national banks were consequently enabled to secure 
and retain a larger portion of the other kinds of money 
in the country — those kinds which could be included as 
a part of their own reserves. As a result of these various 
influences, the cash holdings of the national banks in- 



217 



National Monetary Commission 



creased from $388,900,000 on October 5, 1897, to 
$701,600,000 on October 22, 1907. 

With this increase of nearly $313,000,000 in their cash 
reserves it would have been possible for the banks to 
have nearly doubled their productive investments with- 
out diminishing the ratio of cash to deposit liabilities. 
As a matter of fact, these investments were increased far 
more than this — from $2,661,000,000 to $6,334,000,000. 
This increase was roughly paralleled by the increase in net 
deposit liabilities, which advanced from $2,195,000,000 to 
$5,256,000,000, and the ratio of the cash reserve to deposit 
liabilities was reduced from 17.7 per cent to 13.3 per cent. 

The following table shows the changes in loans, net de- 
posits (not including government deposits) , cash reserves, 
and reserve ratio at the time of the early autumn return of 
the condition of the national banks from 1897 to 1907: 

[Amounts expressed in millions.] 



Oct. S.1897 -- 
Sept. 20, 1898. 
Sept. 7. 1899- - 
Sept. 5, 1900.- 
Sept. 30, I90I- 
Sept. IS, i9o2_ 
Sept. 9. 1903 -- 
Sept. 6, 1904. - 
Aug. 25, 1 90s . 
Sept. 4, 1906- - 
Aug. 22, 1907. 



Loans 


Net 
deposits 


Cash 
reserve 


Ratio to 

net 
deposits. 








Per cent. 


$2,066 


$2, 179 


fo88.9 


IT- 


2, 172 


2, 404 


420. 7 


IT- 


2,496 


2.952 


466. 3 


IS- 


2,686 


3,187 


S18.S 


16. 


3.018 


3.SS4 


539- S 


IS- 


3, 280 


3. 720 


S08. 


13- 


3.481 


3.863 


SS4-3 


14- 


3. 726 


4, 400 


661. s 


iS- 


3.998 


4.73S 


66s. 6 


14. 


4, 298 


4. 927 


626. 


12. 


4,678 


S, 256 


701. 6 


13- 



Every year witnessed an increase in loans (that for the 
last year of the series being the most considerable) and 
also in deposit liabilities. Cash reserves showed a gain, 
except in 1902 and 1906, but the reserve ratio was subject 

218 



Crises Under National Banking System 

to greater fluctuation. Between 1897 and 1902 the decline 
was continuous, with the exception of 1900, when the 
banks enjoyed the benefit of the change in the require- 
ment as to note issue from 90 per cent to the full par 
value of the bonds deposited as security. By 1902 the 
banks had evidently approached as near to legal-reserve 
requirements as they felt was consistent with safety, 
and thereafter loans and deposit liabilities were kept 
roughly within Hmits determined by the amount of cash 
holdings. It will be noted that in 1902 the banks were 
little above, and in 1906 somewhat below the ratio of 
reserve on August 22, 1907, the date of the last return 
before the crisis. That the banks were slightly stronger 
in cash in 1907 than in 1906 may be in part due to the 
earlier date of the return of 1907, nearly two weeks 
earlier than that for the corresponding period in 1906. 
It is evident, however, that the banks were at least in, 
what was for them, a quite normal condition of strength 
just before the beginning of the crisis. But this was not 
on account of any exercise of restraint in making loans, 
since the increase during the previous twelve months was 
greater than for any other year of the period under 
review. Finally, it may be noted that the proportion of 
reserve to deposit liabilities which had become customary 
was distinctly less than it was during the years before 
either the crisis of 1873 or that of 1893. 

Analysis of the condition of the banks by groups does 
not give different results in the case of the country banks 
and those of reserve cities. The net deposits of the 
country banks increased without interruption from 

6158 — 10 15 2ig 



National Monetary Commission 

$963,000,000 on October 3, 1897, to $2,527,000,000 on 
August 22, 1907. Aside from a slight loss in 1900, cash 
reserves also showed a gain in every year, rising from 
$111,000,000 in 1897 to $199,600,000 in 1907. The 
reserve ratio, which was 11.6 per cent at the outset, 
declined rapidly and was constantly in the neighborhood 
of 7.5 per cent from 1902 onward; in 1906 it was 7.5 per 
cent; in 1907, 7.6 per cent. 

In the reserve cities also deposits increased with the ex- 
ception of a single year, 1903, rising from $586,000,000 to 
$1,423,000,000. Cash reserves increased, except in 1902, 
advancing from $94,000,000 in 1897 to $190,000,000 in 1907. 
The reserve ratio was 17.8 per cent at the outset, but was 
in the neighborhood oi 12% per cent from 1901 onward. 
In 1906 it was 12. i per cent; in 1907 it was 13.4 per cent. 

The condition of the banks in the central reserve cities 
presents greater individual differences. In St. Louis both 
deposits and reserves increased regularly with the excep- 
tion of 1900 — the former from $33,000,000 to $1 16,000,000; 
the latter from $8,200,000 to $29,200,000. The reserve 
ratio of the St. Louis banks was below 25 per cent even 
in 1897 and was above that point in only one year, 1905. 
In 1906 it was 24 per cent and in 1907 23.5 per cent. In 
Chicago deposits fell off somewhat in two years, 1900 and 
1906, but increased from $105,700,000 in 1897 to $262,- 
900,000 in 1907. The reserve underwent greater fluctu- 
ation, falling in 1899, 1902, and 1906, but, taking the 
period as a wfiole, was increased from $38,000,000 to 
$66,000,000. Beginning with a high reserve ratio of 36 
per cent in 1897 the Chicago banks soon broke away from 



Crises Under National Banking System 



the traditionally ample reserve which had characterized 
the banks of the city. In 1899 the reserve was 25,4 per 
cent, in 1902 only 21.9 per cent, and thereafter every 
autumn return showed a deficiency until 1907, when the 
banks held a cash reserve equal to 25.3 per cent of their 
deposit liabilities. 

Leaving the New York banks out of consideration, 
every group of banks except those of St. Louis was in a 
slightly stronger condition in 1907 than in 1906; and all, 
judged by the average of the preceding half dozen years, 
were in a normal condition of strength; but as their con- 
dition was somewhat less strong than at the time of the 
reports immediately preceding the financial crises of for- 
mer years, it should have been evident that in case of an 
emergency the pressure upon the banks of New York 
would be even greater than in the past. 

The position of the New York banks is so important a 
factor in our banking system that their condition at the 
time of each autumn report is appended in the following 
table : 

[Amounts expressed in millions.] 



Ratio to 
deposits 



Oct. 5. 1897 - 
Sept. 20, 1898 
Sept. 7, 1899. 
Sept. 5, 1900. 
Sept. 30, 1901 
Sept. IS. 1902 
Sept. 9. 1903- 
Sept. 6, 1904- 
Aug. 25, 1905 
Sept. 4, 1906. 
Aug. 22, 1907 



Loans. 


Net 
deposits 


Cash 
reserve. 


$408 


i?So6.8 


$136.5 


441 


596.0 


152- 7 


541 


707. 7 


177.6 


569 


769.6 


213-4 


611 


811. 3 


215.6 


607 


753-4 


184-3 


631 


741.0 


203. 1 


807 


I.034-3 


287-9 


805 


993-8 


253-2 


702 


827.4 


199-2 


713 


825.7 


218.8 



National Monetary Commission 

It will be observed that the upward tendency of loans 
was not so marked in New York as in the case of the banks 
in general. The $408,000,000 of New York bank loans in 
1897 was nearly 20 per cent of all the loans of the national 
banks; while the $712,000,000 of loans in 1907 was just 
above 15 per cent of the total. Fluctuations in all the 
various items, except the reserve ratio, were no less wide ^ 
than for the various groups of banks or for the banks 
taken as a whole. Even at the beginning of the period 
the New York banks were able to find borrowers for all 
they were prepared to lend, and throughout the period 
they were evidently handling their loan account so as to 
keep just above the 25 per cent requirement against depos- 
its. They did no more than maintain the reserve position 
which previous experience had clearly shown to be inade- 
quate, although the burden resting upon them through the 
relatively greater expansion elsewhere tended to increase. 

As in the case of cash reserves, that portion of the 
reserves of the country and reserve city banks deposited 
with agents increased during the period under review, but 
not so rapidly as the increase in deposit liability. The 
deposited reserves of the country banks were $192,500,000 
in 1897, and $420,000,000 in 1907; while those of reserve 
city banks increased from $104,500,000 to $194,000,000.'^ 

o The enormous increase in reserve and loans in 1904 was a result of the 
decline in trade which marked that year. Loans were made at such abnor- 
mally low rates in New York that outside banks and the trust companies 
of the city found it to their advantage to increase their balances with the 
banks, upon which they received a return of 2 per cent. 

&With the return for April, 1902, statements of reserves for country and 
reserve city banks in the reports of the Comptroller of the Currency do 
not include deposits in excess of the amount which each bank can include 



Crises Under National Banking System 

The failure of this portion of the reserves of these banks to 
increase as rapidly as the growth of their net deposits would 
not, however, tend to diminish appreciably the extent of 
the withdrawals in an emergency, since the determining fac- 
tors at such a time would be the state of the cash reserves 
and the degree of confidence in their reserve agents. 

A more significant indication of the situation as regards 
deposited reserves is afforded by the following table, which 
shows the gross and net amounts due other national banks 
by the national banks of the three central reserve cities: 

[Expressed in millions.] 



Oct. 5. 1897-- 
Sept. 4, 1906. 
Aug. 22, 1907 



St. Louis. 



Chicago. 



Gross Net. Gross. Net 



>I4. o 
41-5 
52-3 



20. 7 
30.3 



S47-5 
1 17. 2 

iiS-8 



$21.7 
69. o 
76. 7 



Gross, i Net. 



5184. o I $iss- o 
297- 5 I 243.8 
259-3 I 213.8 



New York still maintained its commanding position as 
a debtor of national banks. The comparatively unfavor- 
able showing for New York for August, 1907, seems to 
have been due to special temporary influences, for in Jan- 
uary of that year the deposits due other banks held by 
those in Chicago and St. Touis were only $100,000,000 com- 
pared with $262,000,000 in the case of New York. Bal- 
ances with New York banks are subject to wide fluctua- 
tions from day to day, on account of the enormous 
settlements for outside banks which regularly take place 
in that city. There had been no marked change in the 

as a part of its reserves, but the total deposits are given here because they 
convey a better idea of the basis upon which the banks were working and 
also of the responsibilities of the banks which are reserve agents. 



223 



National M on et ar y Commission 

proportion of deposits due to national banks compared 
with the total deposits of the New York banks. They were 
30 per cent of the total in 1897, nearly as much in 1906, 
and 27 per cent in 1907. For Chicago and St. Louis the 
relative importance of bankers' deposits to total deposits 
was at all times considerably greater than in New York.*^ 
But for reasons explained in a previous chapter little 
attention need be given to the condition of the banks of 
those cities. ^ So far as the national banks are concerned, 
then, the statistical position had imdergone only one 
change for the worse — namely, the smaller cash reserves 
of the banks in the country, the reserve cities, and also 
Chicago. The New York banks were comparatively as 
strong as in the past and under no greater relative obli- 
gations to other national banks. They might, however, 
reasonably have expected somewhat greater withdrawals 
in an emergency, because of the smaller cash reserve ratio 
of all the other banks in the system, through the probable 
difference on this account was not remarkably great. 

STATE BANKS AND TRUST COMPANIES. 

In the analysis of previous crises it has not seemed 
necessary to include any detailed reference to credit in- 
stitutions imder state laws. Even as late as 1893 the 
resources of state banks and trust companies were but 
little more than half those of the national banks, and the 
deposits of state institutions in the national banks of the 
money centers were a correspondingly small item relative 
to the deposits of national banks with their reserve agents. 

« Banks in Chicago and St. Louis whose business is to be purely local are 
almost invariably organized under state laws. 
6 See p. 125. 

224 



Crises Under National Banking System 



During the ten years from 1897 the growth of banking 
institutions under state laws was remarkably rapid. 
The total resources of state banks and trust companies 
were reported at $1,981,000 in 1897 and at $7,290,000 in 
1907, compared with $3,563,000 and $8,470,000 in the 
case of the national banks. 

This startling increase among banking institutions out- 
side the national system greatly complicates the problem 
of legislation designed to improve the national banking 
system. But in following the course of the crisis of 1907 
only two matters need be considered — the growth of 
deposits in national banks, due to state institutions, and 
the relations between trust companies and banks in New 
York City. 

On October 2, 1897, the net amount due from national 
banks to state banks of all kinds was only $185,600,000; 
on August 22, 1907, it was $646,000,000. Of course, much 
of this amount was the result of current dealings between 
the banks, but by far the greater portion was made up 
of the reserves of these state institutions, which even in 
the cities held much smaller amounts of cash than the 
national banks. In particular the increase in the deposits 
of state banks and trust companies held by the New York 
banks was most striking and might well have been con- 
sidered alarming. The following table tells the story: 

[Expressed in millions.] 



Net deposits due national banks 

Net deposits due state banks, trust companies, etc. 



Oct. 2, 
1897. 


Sept 4, 
1906. 


$1550 
75-9 


S264. 3 
202. I 



Aug. 22, 
1907. 



$213.8 
196.3 



225 



National M on et ar y Commission 

From a little more than one-third the aggregate of 
bankers' deposits in 1897, the deposits due state institu- 
tions had become in 1907 almost equal to those due the 
national banks. The aggregate of bankers' deposits had 
also become a slightly larger part of the total deposits 
of the New York banks, but the real importance of this 
growth is due to the fact that the cash reserves of the 
state banks and trust companies were notoriously inade- 
quate. Even more than the national banks were these 
state institutions certain to be obliged to draw down 
their deposits in an emergency. That these deposits 
should have been acquired with eagerness and without the 
slightest unfavorable criticism from the public is indeed 
strange. The state banks and trust companies were from 
time to time the subjects of unfavorable comment, and 
efforts were made looking toward the maintenance by 
them of larger cash holdings; but that the receipt of enor- 
mous deposits from these institutions subjected the na- 
tional banks holding them to serious dangers was not 
apparently given a thought. At any rate, the banks 
holding these deposits did not build up reserves any 
larger than they would have carried had they been re- 
ceived from that class of conservative individuals who 
habitually maintain large balances with their banks. 
Even if the brunt of the storm in the autumn of 1907 had 
not 'struck the trust companies, it is certain that their 
requirements would have been relatively greater than 
those of the national banks having deposits with reserve 
agents. 



226 



Crises Under National Banking System 

The growth of state banks in New York City was not 
relatively more rapid than that of the national banks, 
but that of the trust companies was vastly, even dra- 
matically, greater. In January, 1898, the loans of the 
trust companies were about $180,000,000, considerably 
less than half those of the national banks. In August, 
1907, their loans had increased to $610,000,000, com- 
pared with $712,000,000 for the national banks at the 
same date. 

The growth of the purely banking business of the New 
York trust companies subjected the banks to an unprece- 
dented amount of competition, but it can not be said to 
have brought about any appreciable change in the char- 
acter of their operations, nor did it involve any change 
in the proportion of their cash reserves to deposit lia- 
bilities. In times of moderate strain the clearing-house 
banks were often enabled by means of the trust companies 
to make a better showing in the weekly bank statements 
than would otherwise have been the case. As the busi- 
ness of the trust companies was chiefly local, they were 
not subject to seasonal withdrawals of cash, and their 
lending power was, therefore, more nearly the same 
throughout the year. An increase in rates for loans in 
New York was usually followed by a shifting of loans from 
banks to trust companies. By this means the deposit 
liabilities of the clearing-house banks were reduced, thus 
enabling them to preserve the cherished 25 per cent reserve 
ratio. The resort to this device was, of course, greatly 
simplified through the close affiliations between some of 
the large banks and trust companies, and it was so much 



227 



National M on et ar y Commission 

in evidence during the years before the crisis that the 
surplus reserve became quite as much an object of mirth 
as of confidence. 

ElyEMENTS OF WEAKNESS IN THE NEW YORK MONEY 

MARKET. 

The ease with which the growth of the trust companies 
made possible the shifting of tens of millions of loans and 
deposit liabilities seems to have obscured the essential 
unsoundness of the situation. If, for any reason, it 
should become necessary for the trust companies to con- 
tract their banking operations, it would obviously be 
necessary for the banks to shoulder the burden in order 
to save the local situation. In the past the banks could 
carry through some slight curtailment of loans in an 
emergency without involving the business community 
in disaster. The course of the panic of 1907 was to 
show that in an emergency the New York national banks, 
in addition to being obliged to meet heavy withdrawals 
of cash, must also make a positive increase in their loans. 

Another development of this period requires atten- 
tion because it tended to increase the sensitiveness of 
the New York money market in times of moderate strain 
and because it created a serious element of weakness in 
emergencies. The consolidation of corporations together 
with other influences tended toward the concentration 
of all kinds of financial transactions in New York, and 
among them the business of making loans. Outside 
banks, including those of Canada, came to supply an 
increasingly large though variable portion of the funds 
available for loans. No exact statistics are to be had, but 

228 



Crises Under National Banking System 

it was estimated that in 1906 the loans of outside banks 
in New York were no less than $300,000,000." An 
analogous development has taken place in London 
through the lending by foreign banks in that market. 
Now, to maintain payments in these circumstances and 
to prevent extreme fluctuations in the rates for loans are 
extremely difficult matters. The outside banks feel no 
responsibility for the course of the market. They will 
naturally withdraw from it when affairs at home require 
more of their funds or when they have come to distrust 
its future. It therefore becomes necessary for the local 
banks in the money center to be able at all times to 
shoulder at least a part of the loans which may be liqui- 
dated by outside banks, and also to supply the cash which 
they thus secure the power to draw away. 

Another somewhat analogous banking development 
must also be noted. We have already seen that no part 
of our foreign trade is financed on this side. Imports 
are secured through commercial letters of credit, and 
bills against exports are regularly discounted in Europe. 
Anticipatory bills also have long been in use by means of 
which immediate credits are secured against exports of 
future months. During the years of active business 
after 1897 another device was, if not for the first time 
put into use, at least utilized to an extent hitherto 
unknown — the finance bill. Like other bills in form, it 
was made possible by the hypothecation of American 
securities to bankers in foreign countries. The extent 
to which such bills were drawn can not be determined 

oA. D. Noyes, Forty Years of American Finance, p. 356. 



229 



National Monetary Commission 

exactly, but more than once the credit secured in this way 
amounted to several hundreds of millions of dollars. In 
1906 the maximum was reached, and it was generally 
believed that finance bills to the amount of $400,000,000 
or $500,000,000 had been drawn. At the time of the 
crisis of 1907 the amount of these bills was, as we shall 
see, comparatively small, but their extensive use in earlier 
years illustrates the tendency in the New York money 
niarket to employ not only its own resources to the limits 
fixed by law, but also to exhaust every other source of 
credit, both domestic and foreign, leaving nothing in 
reserve for emergencies. 

Taking all these influences together it is evident that 
the New York money market was far more subject to 
severe strain than at any time covered by this investiga- 
tion. To the possibility of withdrawals by outside banks 
must be added the danger of withdrawals by a large group 
of local institutions, the trust companies. Moreover, 
there was the possibility that the contraction of loans by 
outside banks, trust companies, and foreign lenders might 
come together, creating a situation which would be 
extremely difficult to handle successfully in any case and 
well nigh impossible if in normal times the iinportant 
clearing-house banks failed to exercise great caution and 
maintain large reserves. 

THE POUCY OF THE TREASURY. 

Some of the influences which have been just described 
weakened the New York money market in ways for 
which the national banks were not responsible. But 
there was another influence, potent during this period, 

230 



Crises Under National Banking System 

which tended positively to encourage unsound banking — 
a large government surplus. The disposition of the gov- 
ernment surplus both in this and other periods has varied 
with successive Secretaries of the Treasury. Between 
1900 and 1907 deposits of the Government with the 
banks rather than bond purchases were constantly 
favored. No banking objection can be made to this 
practice if all funds immediately upon their receipt are 
thus deposited, but in place of that policy a sort of 
grandfatherly attitude toward the banks was adopted, 
especially by Secretary Shaw. It does not fall within the 
scope of this investigation to consider the numerous 
devices which were made use of by him to relieve the 
money market. They are summarized as follows in an 
admirable study of the relations between "The Treasury 
and the Banks," by Prof. A. P. Andrew: 

Mr. Shaw's administration of the Treasury was marked by at least six 
significant departures from the paths of his predecessors. (I) He placed 
government money with the banks upon other security than government 
bonds; (II) he exempted the banks from maintaining the legal reserve 
against government deposits; (III) he transferred to the banks public 
money which had already been turned into the Treasury; (IV) he arti- 
ficially stimulated the importation of gold; (V) he deliberately withdrew 
money from the banks in certain seasons in order to redeposit it lateral 
and (VI) he forced alternately the enlargement and retirement of the 
note issue by changing his orders about deposit security as he saw fit.« 

Whether the operations of the Treasury were a fun- 
damental influence tending to weaken the credit situation 
may, however, be doubted. After all, the course of the 
New York money market was not very different from 
what it had been in the years before the crises of 1873 
and 1893, when there was no government surplus. With 

oThe Quarterly Journal of Economics, August, 1907, p. 559. 
231 



National M on et ar y Commission 

the exception of a few months before the crisis of 1893, 
when, on account of the silver situation, the business 
atmosphere was tinged with unusual caution, the New 
York banks have always lent to the full extent of their 
resources, even though a part of them was but tempo- 
rarily at their disposal. The Treasury surplus is indeed 
a stumbling block in the way of any proper realization 
of the necessity of maintaining a large available reserve, 
but that such a reserv^e would have been held between 
1900 and 1907, had there been no surplus, is extremely 
doubtful, » 

THE ULTIMATE RESERVE. 

As in our analysis of the banking position before 1873, 
it will be necessary to carry one step further the search for 
the whereabouts of the ultimate reserv^e in our banking 
system. Throughout the period covered by this study a 
few of the New York banks have held the bulk of bankers' 
deposits, the majority of the banks being engaged in 
purely local business. In 1907 this concentration was 
but little greater than in 1873, though on account of the 
magnitude of bankers' deposits the banks holding them 
had become more conspicuous and attracted much more 
public attention. Instead of the seven banks of 1873, 
there were in 1907 and the years immediately preceding 
six banks which regularly held about three-fourths of all 
bankers'"deposits. These banks, in the order of their im- 
portance, were the City, the Bank of Commerce, the First, 
the Park, the Chase, and the Hanover national banks. 
The following table shows the condition of all the 38 New 



232 



Crises Under National Banking System 

York national banks, the 6 banks, and the other 32 banks 
on August 22, 1907: 

[Expressed in millions.] 



Thirty-eight The six 
banks banks. 



Capital 

Surplus and undivided profits 

Ind'vidual deposits 

Due to national banks 

Due to other banks 

Loans 

Due from national banks 

Due from other banks 

Clearing-house exchanges ^d other cash 

items T- 

Cash reserve 

Total resources 

Net bankers' dejwsits 



S114.6 
140. 2 
532- 
259. 
206. 
712. 
45 
9 

131 

218 

1.364 

410 



$71- o 

80. 4 

285. I 

168.6 

158.6 

417-4 

19. I 

3-9 

79 o 
140. 7 
836.0 
304. 2 



Thirty-two 
banks. 



S43-6 
59-8 

247- 5 
90. 7 
47-5 

295. 2 

26. 4 

5-8 

530 

78.1 

S28.0 

106. o 



Comparison Avith the similar table for 1873 "shows that 
remarkable changes had taken place in the position of the 
banks holding bankers' deposits. In 1873 the seven 
banks controlled only about 30 per cent of the resources 
of all the New York national banks. In 1907 the six 
banks controlled over 60 per cent of the total. The 
change in capital and surplus was equally noteworthy — 
from less than 24 per cent to nearly 60 per cent. Other 
items tell the same story. Individual deposits had in- 
creased from less than 20 to more than 54 per cent and 
loans from about one-third to nearly three-fifths. Finally, 
the cash reserve had increased from less than two-fifths to 
about two-thirds that held by all the banks. 

This gro\\i;h of the banks holding bankers' deposits was 
in keeping with their responsibilities and had a double 

a See p. 17. 



233 



National Monetary Commission 

significance. The ability of the other banks to assist the 
six banks in an emergency, as was done in 1873, was 
clearly very much lessened; at the same time the power 
of the six banks, taken together, to cope with an emergency 
was vastly increased. It can not be doubted that any 
agreement upon a common policy in times of difficulty 
could be carried through by them, even without the co- 
operation of the other banks. In 1873 the seven banks 
were weak because they were carrying on business almost 
entirely with bankers' deposits. In 1907 they were weak 
taken singly, but acting together they wqjyild have wielded a 
banking power sufficient, it may be readily believed, for 
almost any emergency. 

The improvement in the position of the banks respon- 
sible for bankers' deposits, however, may be easily over- 
estimated. The greater capital and surplus in them- 
selves did little except to give slightly greater confi- 
dence to depositors, and this gain was perhaps offset by 
more general knowledge that some of these banks were 
controlled by various financial groups whose principal 
interests were not in banking pure and simple. The 
large loan account of these banks did not strengthen 
them as it would have done in 1873, since, on account 
of the entrance of outside lenders into the market, these 
banks were certain to be obliged to increase rather than 
decrease their loans in an emergency. The only certain 
resource for banks holding large bankers' deposits is a 
large cash reserve, and that was as conspicuously lacking 
in 1907 as it had been in 1873. In both years net bank- 
ers' deposits were more than twice the cash reserves of 



234 



Crises Under National Banking System 

these banks, and their proportion of cash to net depos- 
its, like that of the purely local banks, was but slightly 
above the 25 per cent required by law. 

The power of the banks holding bankers' deposits to 
restrain the various dangerous influences which have 
been analyzed was not great. Their situation in this 
respect is not unlike that of the great European central 
banks. When, for example, in London the reserves of 
the other banks are increasing or foreign bankers are 
investing more largely in loans in the London market, 
the Bank of England can do little more than husband 
its own resources. Similarly, the New York banks hold- 
ing bankers' deposits can not check the resort to finance 
bills or the entrance of outside banks into the market 
for loans, but they can maintain large reserves, and 
so long as they are permitted to hold the position of 
central reserve agents it is not unreasonable to expect 
that they should do so. 

That the banks which held the reserves of other banks 
were in no position to meet an emergency was clear 
from the course of the money market during nearly 
every year between 1900 and 1907. As in other pe- 
riods of active business, loans were increased in summer, 
only to be followed by disturbing contraction and high 
rates in autumn. It has indeed been urged in defense 
of the banks that, though these temporary fluctuations 
might have been prevented by them, the proper and 
effective remedy was through changes in legislation. 
The erratic withdrawal and return of money to the 
channels of trade through the operations of the Treas- 

6158—10 16 235 



r 



National Monetary Commission 

ury and the system of note issue were certainly in part 
responsible. But, quite apart from these causes of tem- 
porary difificulty, it is clear that the banks were not 
strong enough to meet the more occasional, but also 
more severe, requirements of an emergency. Their re- 
sponsibility at such a time was in no way connected 
either with the system of note issue or the movements 
of government funds. Trust company balances afford 
an excellent example. The deposits of the trust com- 
panies with the national banks increased steadily with 
the growth of their banking Operations. Most of them 
were city institutions, subject to no seasonal variations 
in the requirements of their depositors for cash, but as 
few of the trust companies held cash reserves, in re- 
ceiving deposits from them the banks were assuming a 
risk of a , particularly explosive character. But they did 
not on this account maintain reserves proportionately 
greater than those held in former years. It is therefore 
difficult to escape the conclusion that, if all government 
funds had been deposited with the banks upon their 
receipt, loans would have been still further increased in 
those months, when, in fact, money was withdrawn from 
the market by the Government. Legislative changes may 
remove obstacles to sound banking, but they can not take 
its place altogether. 

INDICATIONS OF APPROACHING REACTION. 

The failure of the banks holding the ultimate reserve 
of the country to live up to the responsibilities of their 
position is evident in still another direction. While the 
exact moment of the outbreak of the crisis of 1907 could 

236 



Crises Under National Banking System 

not be foreseen, the imminence of a period of trade 
reaction had been for many months so probable that 
precautionary measures might reasonably have been 
expected from these banks, if not from the banks and 
the public in general. A short account of the course of 
events during 1906 and 1907 down to the outbreak of 
the crisis will afford ample evidence of the obvious need 
of caution and will also sei-ve as an introduction to the 
narrative of the crisis itself. 

After the San Francisco earthquake on April 18, 1906, 
eighteen months before the crisis, there were indications 
in plenty that the pace was too rapid and that the equi- 
librium of economic forces was becoming increasingly 
unstable. That catastrophe destroyed an immense 
amount of capital, a loss which, through insurance, was 
widely distributed; but even if it had not occurred it is 
certain that demand for additional capital was outstrip- 
ping current savings seeking investment. Increasing diffi- 
culty was experienced in marketing securities of the 
very highest class. By some journalists and others 
eagerly searching for objections to a prevailing tendency 
this difficulty was attributed to the activities of the 
national and state governments designed to regulate 
corporations; but it can hardly be supposed that this 
superficial view blinded those in responsible positions in 
the financial world. The strain upon capital was world- 
wide, and in the United States municipal bonds whose 
sale would have been stimulated by distrust of business 
corporations could only be marketed when offered at 
lower prices or a higher rate of interest. 



237 



National M on et ar y Commission 

Whatever the causes, the inability to secure capital 
by the sale of securities in a period of active business 
should have been enough in itself to inspire unusual 
caution in the management of banking institutions. 
When corporations of the highest standing are obliged 
to resort to short-term notes it may be assumed without 
question that other corporations are expanding upon an 
insufficient foundation of working capital, that current 
obligations are increasing, and that bank credits are 
being used to their utmost extent. This probability 
might well have been recognized as a certainty when it 
appeared that during the latter half of 1906 and the 
first eight months of 1907 the loans of the national banks 
had increased more rapidly than at any time in the 
history of the system. 

Increasing tension in New York, whenever compara- 
tively slight contraction in loans took place, was another 
indication pointing to the same condition of affairs. It 
suggested that there were few persons in the community 
with idle funds available to take over either the loans 
or the collateral of borrowers, and that, consequently, 
any considerable liquidation of loans would be difficult, 
and, if carried through rapidly, disastrous. 

Another indication of the approach of a period of 
declining activity in trade was the increasing ratio of 
costs reported in many industries. This is probably one 
of the most fundamental causes of industrial reaction 
and the necessity for an occasional period of recuperation. 
During the ten years before 1907 production in many 
branches had more than doubled; as, for example — coal, 



238 



Crises Under National Banking System 

iron, and also railroad traffic. A far more rapid increase 
in the number employed in such occupations was made 
than was compatible with the maintenance of industrial 
efficiency. The incompetent could hold places because 
there were none to fill their positions, and there was no 
time to acquire skill by those capable of acquiring it. 

As a result of these and other causes which might be 
mentioned there could be no doubt that the United 
States, like other countries, was about to pass through 
a period of reaction, though the exact moment of its 
beginning could not be foreseen and might largely be 
determined by fortuitous circumstances. It was so prob- 
able that with each month of 1906 and 1907 the exercise 
of increasing caution might well have been expected in 
all responsible circles. 

Little heed seems to have been given to these warning 
signs, but much was made of every straw which sug- 
gested a possible further advance. On July 31, 1906, 
dividends were resumed on the common stock of the 
United States Steel Corporation, and on August 18 the 
Union Pacific dividend was advanced from 6 to 10 per 
cent; and dividends were begun at the rate of 5 per cent 
on the shares of the Southern Pacific Railroad. Events 
seem to have proved conclusively the ability of these 
companies to earn the dividends which were then de- 
clared, but nevertheless, coming when it did, this action 
exercised an unfortunate general influence. It gave 
encouragement to the unbridled optimism which was 
already too much in evidence. It was preceded and 
followed by a speculative movement on the stock exchange 



239 



National Monetary Commission 

which was made possible through credits granted by the 
banks upon the foundation of the usual summer inflow 
of funds from the interior. The unsoundness of the sit- 
uation was shown during the first half of September, 
when loan contraction of only $27,000,000 brought call- 
loan rates on successive days to 40, 30, and 25 per cent. 
Relief was secured in two ways — through the interven- 
tion of the Secretary of the Treasury and through for- 
eign exchange operations. During September and Octo- 
ber the money in circulation increased nearly $100,000,000. 
Treasury holdings were reduced $23,000,000 by deposits in 
the banks. State and other bonds were accepted as 
security for such deposits on condition that the banks 
should use the released United States bonds as a basis 
for further issues of notes. Nearly $54,000,000 was 
secured through gold imports, which were brought about 
primarily by means of the negotiation of finance bills, 
though the movement was slightly facilitated by the 
deposit of government funds in the banks against gold 
engagements. By these means after the middle of 
September the New York banks were enabled to meet 
further crop-moving requirements without any consid- 
erable loss in cash. I^oan contraction ceased and there 
was even some slight increase. The one apparent gain 
was to enable the bull movement on the stock exchange 
to continue through the autumn months. The last month 
of the year, however, was marked by a return of stringent 
monetary conditions and a declining stock market. In 
January came the usual rettlrn flow of money to New 
York and temporary ease, but the stock market was then 



240 



Crises Under National Banking System 

overshadowed by an influence which made Hquidation 
necessary and upon an extensive scale. 

Owing principally to the enormous exports of gold to the 
United States secured by means of finance bills, the Bank 
of England on October 1 1 advanced its rate from 4 to 5 
per cent, and followed this action on Friday, October 
19, by an advance to 6 per cent, a rate which had been 
reached only three times before during twenty years. 
At the same time the bank intimated to the London 
financial world that the acceptance of American finance 
bills was a menace to the stability of the London market, 
against which the bank would throw the full weight of its 
power and influence. From that time the further nego- 
tiation of finance bills was at an end, and as those drawn 
in earlier months matured payment was exacted, except 
where by previous arrangement a single renewal had 
been provided for. From December, 1906, the liquida- 
tion of these bills was the most potent single factor in the 
situation. So long as it was possible to transfer loans 
to the banks in New York no great difficulty was ex- 
perienced, but toward the end of February it became 
necessary for the banks to contract loans to an extent 
about equal to the increase which had been made during 
the first weeks of the year. The double process of liqui- 
dation soon culminated in the so-called "rich men's panic " 
of March, 1907. Never before or since have such severe 
declines taken place on the New York stock exchange. 
Tke most notable decline was in the case of Union Pacific 
shares, which fell over 50 points within less than two 
weeks. Probably no one security had been used so 
extensively as collateral in finance-bill operations. 

241 



National Monetary Commission 

Some recovery took place at the end of March and in 
subsequent months, though a succession of unfavorable 
influences prevented any active speculative movement. 
Copper had advanced to the extraordinary high price of 
26 cents a pound at the beginning of 1907, reflecting in 
part conditions of demand and supply and in part manipu- 
lation of the market for the metal. It was held stubbornly 
at that price, although demand fell off sharply and stocks 
accumulated. At length in July some concession was 
made in price without, however, stimulating demand. 
Thereafter the price fell rapidly and was only 13 cents at 
the beginning of October. Even with the price cut in 
half, the demand for copper was sluggish, and it became 
clear that the diminishing consumption of copper was the 
fundamental factor in the situation. Copper shares, which 
had advanced with the price of copper, fell sharply though 
hardly enough to discount fully market conditions. 

Another significant occurrence was the failure on June 
28 of New York City's offering of $29,000,000 of 4 per cent 
bonds, the applications for which aggregated only a little 
more than $2,000,000. Finally, it may be mentioned that 
the gain in railroad net earnings was not proportionate 
to that in gross earnings and that during three of the first 
nine months of the year there was a positive decline. 

While the course of prices on the stock exchange after 
the March panic was upward, the market manifested great 
sensitiveness at all times. Early in August came another 
decline, which wiped out more than the gain of the pre- 
ceding months. This August decHne was the only episode 
during the year which can be ascribed in part at least to 



242 



Crises Under National Banking System 

governmental actrvities designed to restrain corporations. 
It followed hard upon the $29,000,000 fine imposed upon 
the Standard Oil Company, which, coming at a time when 
the market was not strong, may be properly regarded as 
occasioning the sharp decline which followed its annoxmce- 
ment. Had the crisis come at that time it might have been 
argued with some plausibility that if not caused it was at 
least precipitated by this rather spectacular exercise of 
judicial power. But the crisis came more than two months 
later, and therefore it can have been at most a contribu- 
ting and not an immediate cause. There is, however, rea- 
son to hold that this and all other governmental activities 
which had the control of corporations as their object did 
quite as much good as harm from a purely financial point 
of view. 

Government interference in the affairs of corporations 
may have caused some depreciation in their securities and 
might also have caused plans for the investment of capital 
and earnings in the improvement of corporate properties 
to be deferred. But there was no diminution in the de- 
mand of corporations for additional capital so that it 
becomes necessary to show that there were savings seek- 
ing investment which would have been available but for 
alarm as to the future returns from investments in cor- 
porations. There is, however, no evidence whatever that 
there was available idle capital either in this country or 
elsewhere in 1907. On account of the increased cost of 
living and the growth of extravagant expenditure it is 
probable that there had been a relative decline in new 
savings, and as borrowers of all kinds had difficulty in 



243 



National Monetary Commission 

securing capital the contention that govetnmental activities 
were the controlHng factor in the situation falls to the 
ground. 

On the other hand, in so far as government policies 
tended to check speculation and suggested the need of 
caution they served a most useful purpose. Had stocks 
advanced rather than declined in August it is quite certain 
that the banks and the business community would have 
been far less able to withstand the approaching shock than 
they actually were in October. The situation was in many 
respects similar to that just before the panic in May, 1884, 
although in the earlier year in addition to successive de- 
clines on the stock exchange there had been considerable 
trade reaction. In 1907 the outlook for the future was not 
promising in many basic industries, but there had been 
no positive reaction except in the case of copper. 

Stock exchange liquidation in March and August had 
vastly improved the credit situation as contrasted with 
the previous year. There was no serious monetary strain 
in New York during August and September, although the 
amount of money in circulation increased far less than in 
previous years. We have already seen that the New 
York banks on August 22 were in slightly better shape 
than at about the same time in 1906. As the next report 
to the Comptroller of the Currency was not made until 
December, the condition of the banks in general just 
before and during the greater part of the crisis can not 
be analyzed. In the case of the New York banks resort 
may be made to the weekly bank statement. The fol- 
lowing table shows the condition of the banks on August 



244 



Crises Under National Banking System 

24 and just before the outbreak of the crisis on October 
19; figures for corresponding dates for the previous year 
are also included: 

New York bank statement. 
[Expressed in millions.] 



Aug. 24. Oct. 19 



1906. 



Aug. 23. Oct. 20 



Loans 

Deposits 

Reserve 

Surplus reserve 



5i. 088.0 

I, 048. o 

272. o 

9- 9 



5i, 076. o 

I , 025. o 

267. o 



Bi, 071. o 

1,053.0 

267. o 

4. 2 



Si, 002. o 

1 , 062. o 

271. o 

6.2 



In 1906, notwithstanding large gold imports and aid 
from the Government, the banks with difficulty were able 
to maintain a surplus reserve. In 1907 there had been 
no gold imports, and the release of money by the Treas- 
ury had been no greater in amount and a relatively 
small part of it had been secured by the New York banks. 
The surplus reserve was larger in August of the crisis year, 
and notwithstanding a slight loss in cash, was increased 
somewhat during the two months preceding the beginning 
of the panic. 

But it was the foreign exchange situation in which 
there was by far the greatest improvement in October, 
1907, contrasted with the same month of 1906. It is true 
that exchange rates during the first three weeks of October 
were in the neighborhood of the export point. This was 
due to European sales of American securities, which were 
largely sold as a result of a severe crisis in Amsterdam 
and Hamburg. On October 19 $1,500,000 was engaged 



245 



National Monetary Commission 

for shipment to Germany. There were, however, no 
finance bills approaching maturity, and an unusually 
small amount of anticipatory bills had been drawn, so 
that as soon as grain and cotton should begin to move in 
quantity it was certain that exchange would rule strongly 
in favor of this country. 

After the August decline on the stock exchange a num- 
ber of unfavorable events served to weaken confidence. 
The most important of these were the disclosures regard- 
ing the affairs of the New York street railway companies, 
which culminated in the appointment of receivers toward 
the end of September. There is, however, no evidence 
that distrust of the solvency of the banks either in New 
York or elsewhere had been excited. During the crisis 
distrust rapidly developed, but this was owing to causes 
similar to those which had produced the same effect in 
other crises and can be naturally accounted for by the 
events which marked its beginning. 

THE BEGINNING OF THE CRISIS. 

The initial episode of the crisis was, as has often hap- 
pened in previous instances, insignificant enough. Cop- 
per was, as we have seen, the one branch of industry in 
which a positive decline had taken place. No time could 
possibly have been chosen so unfavorable for venture- 
some attempts at manipulation either of copper itself or 
of the shares of copper companies. It happened that the 
particular disaster which precipitated the crisis was a 
copper gamble, the outcome of which would ordinarily 
have had no public importance. 



246 



Crises Under National Banking System 

An unsuccessful attempt to corner the stock of a cop- 
per company of secondary importance involved certain 
brokerage firms, including that of the brothers of Mr. 
F. A. Heinze, who at the beginning of the year had be- 
come president of the Mercantile National Bank by se- 
curing a majority of its stock. Mr. Heinze had acquired 
a large fortune from highly spectacular operations in 
Montana copper properties, and distrust of his methods 
led many depositors to withdraw their accounts after the 
change of management. The diminishing resources of 
the bank seem to have been used to an increasing extent 
in the furtherance of copper enterprises and speculation, 
and the failure of the copper corner brought matters to a 
head. The bank was unable to meet unfavorable bal- 
ances at the clearing house, which assumed large propor- 
tions because alarmed depositors were shifting their 
accounts to other banks. A request for assistance from 
the clearing house was granted after an examination to 
determine the solvency of the bank and upon condition 
that the president and entire board of directors should 
resign. On October 21 the bank began business under a 
new management and thereafter ceased to be a disturb- 
ing factor in the situation, though, it may be added, in 
January it was deemed advisable to close the bank for 
liquidation. 

While the reorganization of the Mercantile Bank was 
being carried out the clearing house was given an op- 
portunity to intervene in the affairs of certain other banks 
whose management had long been regarded with dis- 
trust. One of the directors of the Mercantile Bank was 



247 



National Monetary C ommis s io 



n 



C. F. Morse, whose activities in the industrial and banking 
world had been of an extreme character, even when 
judged by American speculative standards. He first 
became prominent as a promoter of the American Ice 
Company, an enterprise disastrous to its shareholders, 
and in recent years had been actively engaged in the 
formation of a combination of shipping companies en- 
gaged in the Atlantic coasting trade. For a number of 
years he had been one of the largest owners of shares in 
New York banks, but, it is important to observe, only in 
banks of moderate size. He was a director in seven 
banks, over three of which he seems to have exercised 
complete control. In securing this chain of banks the 
shares of one bank, along with other collateral, were 
used as a security for loans with which to purchase shares 
in another bank, and so on in succession, while the various 
banks were efficient instruments in the furtherance of 
other enterprises. Morse had long been regarded with 
distrust in banking circles, and a clearing-house investi- 
gation of his methods had been made as early as 1902, 
but it led to no definite action. His connection with the 
Mercantile Bank seems to have frightened depositors in 
his other banks, the most important of which was the 
National Bank of North America, and two pi them were 
obliged to appeal to the clearing house for aid on October 
19. Assistance was granted upon condition that Morse 
should retire altogether from banking in New York. 
Much the same course was taken with Messrs. E. R. and 
O. F. Thomas, who were associated with the Heinzes, 
and were the chief owners of the Mechanics and Traders 



248 



Crises Under National Banking System 

Bank, a state institution in the clearing house, and the 
ConsoHdated Bank, which was not a member of the asso- 
ciation. Taken together, five banks, members of the 
clearing house, were concerned, three of which were 
national and two state banks, and also three banking 
institutions outside the association, a national, a state 
bank, and a trust company. The total deposits of the 
five banks on October 12 were only $56,000,000, and those 
of the entire number only $71,000,000. It was not, 
therefore, a very difficult matter to afford them the as- 
sistance they required. Various clearing-house banks 
subscribed to a fund of $10,000,000 to be used if neces- 
sary, and on Monday, October 21, it may be said that the 
clearing house had completed the work of putting its 
affairs in order. It is to be noted that there had been 
nothing in the nature of a crisis up to this time, although 
the difficulties of these banks doubtless gave rise to a 
vague feeling of distrust, which speedily assumed dangerous 
proportions when it became known that certain far more 
important banking institutions were also in need of 
assistance. 

The narrative of the crisis may with advantage be inter- 
rupted at this point to call attention to the significance of 
this Heinze-Morse episode as an example of a deep-seated 
cause of weakness in the financial system of the country. 
National banks are not allowed to open branch offices, and 
most of the states have enacted similar legislation. Con- 
sequently, banks are numerous, nearly 16,000, not includ- 
ing savings banks, and are generally of small size. While 
this system of independent local banks has very great ad- 



249 



National M on et ar y Commission 

vantages, it has also certain serious, though not incurable, 
disadvantages. Few banks are large enough to be the 
principal interest of those who own and control them. 
Upon the whole the system has not worked badly, since 
the directorate has commonly included capable men from 
various occupations, but danger arises when an individual 
or group of closely associated individuals gains control of 
a bank for the purpose of furthering private undertakings. 
This danger is of course vastly more serious when a bank 
is situated in New York or some other money center in 
which even the failure of a bank engaged in purely local 
business has more than a local effect upon public confidence. 
Unfortunately there seems to have been a distinct tendency 
in this direction in recent years, and there is an almost en- 
tire lack of definite public opinion opposed to the practice. 
The good nature and optimism characteristic of the country 
extends even to financial matters, regarding which there 
is a painful absence of thorough unflinching criticism in 
any financial journal. The attitude of publicists is com- 
monly weak and ineffective, and is well illustrated by the 
following comment upon the particular case of the Morse 
banks taken from an influential New York journal: 

A few capitalists of no great standing, actively engaged in speculative 
industrial schemes of their own, were gaining control of a group of banks 
through mere stock ownership on a margin. * * * The possibility of 
danger had been known for six years past. If it be asked why no one inter- 
fered, the answer is that no one outside of the banking department had a right 
to examine the soundness of these banks and challenge the manner of con- 
trol; second, that the very hazards involved in existing conditions rendered 
open accusation extremely perilous. « 

Surely a money market in which urgently needed reme- 
dies are thus treated can hardly escape an occasional up- 

a The Nation, October 24, 1907, p. 384. 
250 



Crises Under National Banking System 

heaval. A healthy tradition should be cultivated which 
would lead depositors to desert a bank known to be con- 
trolled by one man, or closely identified with a single enter- 
prise. Even when honestly managed there is the obvious 
danger which arises from lack of a wide distribution of 
risks. The evidence in the Morse trial certainly suggested 
an absence of rigor on the part of the Comptroller of the 
Currency in suppressing abuses. An even more effective 
remedy might have been applied through clearing-house 
action, a promising means of improvement which is now 
being adopted in many cities. 

TRUST COMPANY DIFFICUIvTIES. 

Returning to the narrative of events in New York, it 
may be noted once more that there had been nothing in 
the nature of a crisis during the week the clearing house 
was putting its affairs in order. Crisis conditions devel- 
oped the following week and were occasioned by the diffi- 
culties of a certain trust company. The Knickerbocker 
Trust Company was the third largest trust company in 
New York, having deposits of $62,000,000. The connec- 
tion of its president with some of the Morse enterprises 
engendered distrust, which made itself felt in a succession 
of unfavorable clearing balances. On Monday, October 
21, the National Bank of Commerce announced that it 
would discontinue clearing for the Knickerbocker on the 
following day. An unofficial committee representing a 
few trust companies and banks was not given an oppor- 
tunity to examine its affairs until the last moment, so 
that it would have been difficult if not impossible to 

6158—10 17 251 



National M o n et ar y Commission 

take definite action. Nothing was done aside from the 
issue of a reassuring statement by the directors in which 
the resignation of its president was announced. On Tues- 
day, after a run of three hours, during which $8,000,000 
were paid out, the company was forced to suspend. 
Whether the company could not have been assisted is 
not clear, but that, if possible, it would have been of ad- 
vantage both to the banks and the other trust companies 
is certain. The size of the company alone rendered assist- 
ance an undertaking of no little difficulty, but the condi- 
tion of its assets at the time could not have been hope- 
lessly unsatisfactory, as the company was able to resume 
business in the following March under a plan of reorgani- 
zation agreed upon by its depositors and shareholders. 
The plan of reorganization adopted, however, showed 
that the assets of the company were even then far from 
being in liquid condition, and in the absence of any asso- 
ciation among the trust companies or of any feeling of re- 
sponsibility on the part of the clearing-house banks, the 
suspension of the company was unavoidable. 

Had the Knickerbocker Trust Company been a bank 
and a member of the clearing house, it is highly probable 
that it would have been assisted, following the precedent 
of 1884. Relative to the increasing magnitude of bank- 
ing operations in New York, the Knickerbocker was not 
so large as the Metropolitan Bank in 1884. Apparently 
no proposal to assist the company was considered, and 
this is readily explicable. Relations between the banks 
and the trust companies had been somewhat strained for 
a number of years. The banks complained of the unfair- 



252 



Crises Under National Banking System 

ness of competition with institutions which were not re- 
quired to hold a large cash reserve. In 1903 the clearing 
house had adopted a rule which required all trust com- 
panies clearing through members of the association to 
accumulate a reserve which, though smaller than that of 
the banks, was considerably larger than was held by 
most of the trust companies. Rather than submit to 
this requirement, nearly all of these gave up clearing- 
house privileges, the most important exception, curiously 
enough, being the Knickerbocker Trust Company." It 
would therefore seem to have deserved peculiar considera- 
tion on the part of the clearing-house authorities. It may 
also be suggested that assistance might well have been 
granted from purely selfish motives. A group of banking 
institutions is very similar to a row of bricks, the fall of 
one endangering the stability of the rest. When all the 
circumstances are considered, however, the failure of the 
clearing-house authorities to take any action was doubtless 
the most natural course, and though unfortunate in its 
consequences, can hardly be regarded as blameworthy. 

Equally mild judgment can not be passed upon the 
means which were adopted at the next stage of the 
crisis. On Wednesday, October 23, a run began on the 
Trust Company of America, the second of the trust com- 
panies in size, having deposits of $64,000,000. The presi- 
dent of the Knickerbocker was one of its directors, but 
the unfortunate disclosure that its affairs had been the 

«The reserve of the Knickerbocker Trust Company on August 22, the 
date of the last return to the state superintendent of banks, was$4, 745, 000, 
a little more than that of any other trust company in the city and very 
much more than that of most of them. 



253 



National Monetary Commission 

subject of a conference on Tuesday was the chief influ- 
ence in precipitating a panic among its depositors. The 
company withstood a run which continued for two weeks, 
during which it paid out some $34,000,000; on Wednes- 
day and Thursday paying $1 2,000,000 and $9,000,000. The 
Trust Company of America and also the Lincoln Trust 
Company upon which a run began on Thursday were 
assisted, since their assets were apparently in a more satis- 
factory condition than those of the Knickerbocker, but still 
more because it was clear that the foundation of the entire 
credit structure was endangered. The steps taken, how- 
ever, were slow and the means adopted were not sufficiently 
clear in import to renew general confidence. On Wednes- 
day, October 23, a committee of five trust company 
presidents was formed to receive applications for assist- 
ance, make examinations, and report to meetings of all 
trust company presidents. Through this committee money 
was provided from day to day in large amounts, bonds 
contributed by various trust companies being turned 
over to national banks, which used them as security 
for additional government deposits. Confidence was not 
restored until, on November 6, announcement was made 
that a majority of the shares of the Trust Company of 
America and of the Lincoln Trust Company had been- 
placed under the control of a committee of trust company 
presidents and that the "necessary financial arrange- 
ments had been made to enable both companies to pro- 
ceed with their business." The inference can not be 
escaped that the New York money market was not ade- 
quately organized to cope quickly and effectively with an 
emergency of this kind. 

254 



Crises Under National Banking System 

With the rapid growth of trust companies, an increas- 
ingly large part of the banking business of the city was 
entirely without organization. The trust companies 
should either become members of the clearing-house asso- 
ciation or at least form some organization of their own. 
They would then have the machinery ready for prompt 
action and some sense of common responsibility would 
be developed. It is indeed true that on account of their 
past the three companies were not deserving subjects 
for assistance. Their methods of attracting business, 
absurdly high interest on deposits, and the collection of 
out-of-town checks without charges, were generally re- 
garded as unsafe and even piratical. But the unwilling- 
ness of some of the trust companies to join in measures of 
relief at all, or at least in proportion to their resources, 
can not be attributed to this cause alone. But for 
the powerful influence of Mr. J. P. Morgan it is prob- 
able that no united action whatever would have been 
taken. It is certainly an element of weakness in our central 
money market that influential credit institutions should 
have to be dragooned into doing what is after all in their 
own interest as well as to the general advantage. 

This trust company episode suggests one conclusion of 
general application. Unless it is possible at the outset to 
take measures which are almost certain to restore confi- 
dence in threatened banking institutions, it is far better 
to leave them to their own devices, either liquidation or 
reorganization. The money furnished the two trust com- 
panies saved them from failure, but served no purpose of 
general importance. If it had been used to meet the 



255 



National Monetary Commission 

demands of banks throughout the country, alarm might 
possibly have been delayed and general suspension 
avoided. 

UNFORTUNATE DELAY OF THE CLEARING HOUSE. 

During the three days of heavy runs upon the trust 
companies New York was threatened with a general 
panic, and a number of other trust companies experi- 
enced runs of varying degrees of severity. A few small 
mismanaged banking institutions in the outskirts of the 
city were forced to suspend. Depositors began to with- 
draw money from savings banks and they were obliged 
to exercise their right to require sixty days' notice. Loans 
could only be secured with extreme difficulty and the fall 
in stock exchange prices, while not so extreme as in 
March, was alarmingly violent and affected securities 
more generally. The strenuous efforts that were made to 
relieve the situation were but partially successful, because 
they lacked the authority and backing of the Clearing 
House Association. As in the case of the Trust Com- 
pany of America, the relief afforded was of a piecemeal 
character without any certainty of its continuance. On 
Thursday, in order to prevent complete collapse on the 
stock exchange, Mr. J. P. Morgan formed a money pool 
of $25,000,000, to which some of the leading banks and 
financiers subscribed. On Friday, also, a similar pool was 
formed, though $10,000,000 proved adequate for the 
purpose. In no crisis since the civil war have matters 
been allowed to drift along during so many days of acute 
panic. 



256 



Crises Under National Banking System 

Even though it would have been impossible, to secure 
agreement among members of the clearing house to 
provide the trust companies with the assistance they 
required, the immediate issue of loan certificates should 
have been authorized to meet the general situation. The 
failure to issue certificates on Tuesday or Wednesday 
would be difficult to explain, if the reasons for delay had 
not been set forth by no less an authority than the pres- 
ident of the clearing house, who observed subsequently: 

Well, the panic occurred. The institutions that had been weakened by 
unwise investments went down. New York was the storm center. The 
paramount question was, Could the storm be stayed before its work of 
devastation and ruin should spread over the entire country? This was the 
problem confronting the clearing-house committee. The committee knew 
that the issuance of clearing-house certificates would immediately bring 
about a restriction of cash payments throughout the country, causing 
widespread business inconvenience and embarrassment. Hoping that the 
panicky condition might subside, the committee postponed from day to 
day the issuance of clearing-house certificates, honoring the drafts that 
were being made against our rapidly falling reserve until it showed a 
deficit of $53,ooo,oooa [sic], and then concluded it would be folly to hesi- 
tate longer, and clearing-house certificates were issued. 

The failure to issue clearing-house loan certificates at 
least as early as Tuesday was the most serious error made 
during this crisis. All experience in former crises went 
to show that the early issue of certificates had a calming 
effect upon the community, because they made it possible 
for the banks to extend relief more freely by granting 
accommodation to borrowers, and because they prevented 
in part the weakening of particular institutions through 
unfavorable clearing-house balances. Had clearing-house 
loan certificates been issued early in the week it would 

« It was not until two weeks after the issue of loan certificates that the 
bank statement showed a deficit of $53,000,000. 



2S7 



National Monetary Commission 

not have been necessary to resort to the cumbersome 
device of money pools. Liquidation on the stock ex- 
change would have been somewhat less, and the alarm, to 
which the sudden fall in security prices contributed, 
would have been in part escaped. 

During the three days of heavy runs upon the trust 
companies the strain upon the clearing-house banks was 
very severe, as they had to furnish most of the money 
required by the trust companies, whose reserves were 
deposited with them. At the same time they were ship- 
ping money to the interior banks, and they also suffered 
some loss from payments to their own frightened depos- 
itors. But at the close of the week there were many 
indications that the worst of the panic in New York was 
past. Withdrawals of money by local depositors were 
diminishing, the savings banks were exercising their right 
to require sixty days' notice from depositors, and the trust 
companies had agreed to pay depositors so far as possible 
in certified checks upon clearing-house banks. Had New 
York been a city with only local responsibilities it is 
probable that the disturbance would have gone no further ; 
but, as in 1873 and in 1893, the disasters in New York 
had caused alarm to spread throughout the country. The 
country banker and his depositors were apparently un- 
moved by the Morse-Heinze troubles, but hard upon the 
news of the difficulties of the Knickerbocker Trust Com- 
pany came telegraphic demands from all over the country, 
including the other central reserve cities, for the calling of 
loans and the shipment of currency. A number of adverse 
developments had also taken place in various parts of 



258 



Crises Under National Banking System 

the country while New York was struggUng with its own 
difficulties. The Heinze troubles involved a bank in 
Butte, Mont,, and in Goldfield, Nev., runs on the banks 
due to local causes forced them to suspend. In Provi- 
dence, R. I,, a large trust company with deposits of 
$25,000,000 was obliged to close, and other smaller banks 
were subjected to runs. The various Westinghouse com- 
panies went into the hands of receivers on account of 
inability to secure the renewal of large floating indebted- 
ness, and as a consequence the Pittsburg Stock Exchange 
was closed'* — an exchange dealing almost exclusively 
with local securities. 

These widely scattered troubles contributed to, but 
were not the principal cause of, the alarm which spread 
throughout the country, but which was mainly due to the 
panic in New York. Everywhere the banks suddenly 
found themselves confronted with demands for money by 
frightened depositors; everywhere, also, banks manifested 
a lack of confidence in each other. Country banks drew 
money from city banks and all the banks throughout the 
country demanded the return of funds deposited or on 
loan in New York, The evidence of lack of confidence in 
and between the banks is clear and it points to a serious 
difficulty in carrying on banking in this country. For a 
historical parallel in England we should need to go back 
to the first quarter of the last century. Explanation is 
simple, however, if the course of our previous crises is 
recalled. Seven times during the last century the banks 

o The Pittsburg Exchange remained closed throughout November and 
December, as did also that of New Orleans, 



259 



National Monetary Commission 

suspended payment in some measure at least, and there 
has been a currency premium, the last occasion having 
been so recent as 1893. There is a well-grounded belief 
among the people that it will be difficult to secure cash 
during periods of economic disturbance. In all countries 
in times of crisis some depositors withdraw their money 
and hoard it from unreasoning fear. In the United States 
there are also withdrawals by prudent depositors who 
wish to be absolutely certain to have the money needed 
in their affairs, and by others who are influenced by the 
prospect of a handsome profit in a few weeks through the 
sale of money at a premium. Former suspensions have 
established a tradition which is an ever-present source of 
weakness and which can only be broken by successful 
endurance by the banks of the strain of a crisis. The 
crisis of 1907 provided an exceptionally favorable oppor- 
tunity, since general economic conditions were far less 
unsound than on many occasions when payment was sus- 
pended in the past. Unfortunately almost as soon as 
withdrawals began, and before the New York banks had 
suffered a serious loss in reserve, cash payments were 
restricted once more. Moreover, payments were restricted 
for the first time immediately upon the issue of clearing- 
house loan certificates. 

£;XPIvANATlON OV^ THE) SUSPENSION OF PAYMENTS BY THE 
NEW YORK BANKS. 

Before the beginning of the week ending November 2 
a few banks elsewhere may have already suspended, but 
this is not a matter of importance, as it was restriction in 



260 



Crises Under National Banking System 

New York that inevitably precipitated more or less com- 
plete suspension throughout the entire country. This 
discreditable step was taken when the New York banks 
were much stronger than on other occasions and when 
prospects for securing additional funds were far more 
promising. The reasons for this action and the necessity 
for it are the most important questions to which the 
course of this crisis gives rise. In order to answer them it 
will be necessary to interrupt the narrative of the crisis in 
order to make a detailed analysis of the condition of the 
New York banks at the time clearing-house loan certifi- 
cates were authorized. 

The bank statement for the week ending October 26 
must serve as the point of departure, though it is, of course, 
unsatisfactory, because, being based upon averages, it 
shows a better condition than was actually the case. The 
following table gives the principal items in the statement 
for October 26, with the changes from the previous week: 

[Expressed in millions.] 



Loans 

Net deposits .1 

Reserve held 

Reserve percentage . 

Surplus reserve (deficit) 



A somewhat more accurate idea of the condition of the 
banks can be gathered from the following table, which 
shows the condition of the five banks which had been 




Difference 
from pre- 
vious week, 
increase ( +). 
decrease ( — ) . 



+ $10.9 
- J5i.9 
-$12.9 



261 



National Monetary Commission 

obliged to request assistance, and the condition of all the 
other claaring-house banks: 

[Expressed in millions.] 



Loans 

Net deposits 

Reserve held 

Reserve percentage , 
Surplus reserve 



Five Morse-Heinze 
banks. 



Oct, 19. 0ct. 26 



560.8 
fSS.4 
?io. 7 
19-3 



SS2.3 
539-9 
$4.5 
10.8 



All other clearing- 
house banks. 



Oct. 19. Oct. 26 



5i, oi6. 

$970. 

$256. 

26. 

$14- 



. 


$i.o3S- 


•3 


$982. 


■9 


$250. 


•S 


25- 


• 4 


$A. 



The really solvent banks, it will be observed, had re- 
lieved the situation by an increase of nearly $20,000,000 
in loans. Their cash loss was only $6,700,000, and they 
still held a surplus reserve of moderate proportions. But 
these changes do not adequately represent actual condi- 
tions. The statement for the following week shows an 
increase in loans of $60,000,000 and a loss in reserve of 
$30,000,000. Some part of this increase in loans, with its 
resulting increase in deposit liability, was certainly made 
during the previous week, and doubtless an even more 
considerable part of the loss in cash had been incurred 
since payments were restricted during the later week. If 
we may assume that half the loan and deposit increase was 
made as early as October 26 and that two-thirds of the 
cash loss had then been sustained, the statement would 
have been as follows: 

Loans $1,065 ($1,035+130) 

Net deposits $992 ($9824- $30— $20) 

Reserve $230 ($250— $20) 

Reserve percentage 23.2 



262 



Crises Under National Banking System 

This table has an unreal appearance, but it is based 
upon an analysis of all the available data. The bank 
statement for November 9 showed a very small loss in 
reserve, only $4,300,000, not very far from the amount 
of reported movements of money between the banks, 
the interior, and the subtreasury. The statement for 
November 2, therefore, probably represented actual con- 
ditions very closely. The reported movements of money 
between banks, the interior, and the subtreasury for the 
week ending November 2 showed a loss of $7,000,000, 
and since the banks must have lost some money locally 
it is safe to assume that at least $10,000,000 of the re- 
ported $30,000,000 decrease in reserve came during the 
week. In the case of loans the figure given is hardly 
more than a guess, but as the banks made loans more 
freely after the issue of loan certificates, the assumed 
increase of $30,000,000 for the week ending October 26 
is prabably too large rather than too small. 

The actual condition of the banks can hardly have been 
worse than the showing in the table, and was probably 
somewhat better. The estimated loss in reserve of 
$36,000,000 is small after so eventful a week, and does 
not indicate the extent to which the banks supplied 
depositors with money. On Thursday, October 24, 
$25,000,000 was deposited with the New York banks by 
the Secretary of the Treasury, and between October 19 
and October 31 $36,000,000 was secured in this way." 
Just about half of the money which was paid out by the 

oResponse of the Secretary of the Treasury to Senate Resolution No. 33 
of December 12, 1907, pp. 57-59- Senate Doc. No. 208, 6oth Cong., ist 
session. 

263 



/ w] 



National M o n et ar y Commission 

banks during the two weeks ending November 2 was 
secured from the Government. Reported movements of 
money between banks and the interior accounted for a 
net loss of $33,344,000. As a result of subtreasury op- 
erations which included some transfers of money to banks 
in other cities having subtreasuries the New York banks 
gained $29,500,000. It will thus be seen that the Govern- 

ent supplied the banks with nearly all the money with 
which they responded to the demands of outside banks. 
The loss in reserve of the banks is, therefore, accounted for 
by payments made to meet the demands of local deposit- 
ors, including the trust companies. This statement may, 
of course, be reversed with equal truth — the Government 
supplying local needs, outside needs being supplied from 
the reserves of the banks. In any case it can not be 
said that the New York banks had experienced an ex- 
hausting depletion of their reserves. Out of a total 
reserve of $256,900,000 on October 19, the solvent banks 
paid out only $36,000,000 from their reserves during the 
two weeks to November 2; and if we may assume some 
approach to the real condition of affairs in our estimate 
of the actual condition of the banks, they had only paid 
out $26,000,000 at the time payments were restricted. 

It may, however, be urged, and with truth, that the 
test of the ability of the banks to maintain payments is 
not the amount of the aggregate reserve unless it is dis- 
tributed with some evenness among banks in proportion 
to their liabilities. In earlier crises we have seen that 
the few banks holding bankers' deposits were subject 
to particularly severe strain and that when their reserves 



264 



Crises Under National Banking System 



were depleted suspension was unavoidable in the ab- 
sence of any pooling agreement. The condition of the 
individual banks was not disclosed during the crisis. 
October 26 is the last date for which such information is 
available. The following table shows the condition of 
the six banks holding the bulk of bankers' balances and 
that of the other clearing-house banks (not including the 
five already eliminated) on October 19 and October 26 
1907: 

[Expressed in rnillions.] 



Loans 

Net deposits 

Reserve 

Reserve percentage 



Six banks. 



Oct. 19. Oct. 26 



»S44- 2 

$SOT- 4 

$139- 7 

27. 2 



5S6». 4 

5s22. 6 

5132. 2 

253 



Other clearing-house 
banks. 



Oct. 19. Oct. 26 



5471. 8 

S462. 9 

5i 17. 2 

253 



$467.7 

$461.3 

$118.0 

25.6 



No very striking differences between the two groups of 
banks are disclosed in the table. The tendencies indi- 
cated, however, are significant. The six banks taken to- 
gether had relieved the situation somewhat by a moderate 
increase in loans, while there had been a little contraction 
by the other banks. The reserves of the six banks had 
fallen away by $7,500,000, and their reserve ratio was 
rather less satisfactory, although still above the legal 
requirement. On the other hand, the reserves of the 
other banks had increased slightly, and also their reserve 
percentage. There is no means of determining whether 
the actual condition of the six banks relative to the other 
banks was less favorable than that based on averages. 



265 



National Monetary Commission 

It is probable that the six banks made a large part of the 
loans not shown in the statement, and probably much of 
the estimated actual loss in reserve was due to payments 
made by them. On the other hand, between October 19 
and October 31 the six banks secured additional govern- 
ment deposits to the amount of $30,700,000, while the 
other banks in the clearing house secured only $6,000,000. 
This distribution of the government money was entirely 
proper, as it corresponded, at least roughly, with the rela- 
tively greater strain which was imposed upon the six 
banks in consequence of the panic. But its complete jus- 
tification depended upon whether the banks securing the 
lion's share of the government deposits fully lived up to 
their responsibilities. Finally, it may be observed that 
even if all of the $20,000,000, by which we have assumed 
the actual reserve was below the average reserve, had 
come from the six banks they would still have held 
$112,000,000 to meet further requirements, an amount 
equal to at least 20 per cent of their deposit liabilities. 
The suspension of payments by the banks can not, there- 
fore, be attributed to the exhaustion of the reserve held 
by any particular group of banks in the clearing house. 
If this analysis is carried one step further and atten- 
tion is given to the condition of particular banks, the 
explanation of suspension while reserves in the aggregate 
were still large will be disclosed. It is with some hesi- 
tation that the writer singles out the particular banks 
whose reserves happen to have been depleted most se- 
riously. It is proper to say that the differences disclosed 
between different banks do not in the slightest degree 



266 



Crises Under National Banking System 



reflect upon the management, the credit, or the standing 
of the individual banks. None of the banks was sub- 
jected to any influences except those arising out of the 
general situation. And, furthermore, the banks which 
were apparently the greatest sufferers were so because 
they were doing, either absolutely or relatively, more for 
their customers and the community at large than their 
fellows. 

The following tables show the condition of the six most 
important banks in the New York Clearing House on 
October 19 and 26, 1907: 

[Expressed in millions.] 



City 

Commerce . 

First 

Park 

Hanover, - 
Chase 



Loans. 


Deposits. 


Oct. 19. 


Oct, 26. 


Oct. 19. 


Oct. 26. 


$148. 2 


$159- S 


$126.8 


$138. 


130- r 


129. 


104- 


138. 


91. 6 


102. 7 


84. S 


88. 


69- 3 


68.0 


76. S 


73- 


Si -3 


S6.6 


61.6 


64. 


SO. 7 


52-4 


53-9 


54. 



Reserve held. 



Oct. 19. 



Oct. 26. 



Percentage. 



Oct. 19. 



Oct. 26. 



Govern- 
ment de- 
posits re- 
ceived be- 
tween Oct. 
19 and 31. 



City 

Commerce 

First 

Park 

Hanover. . 
Chase 



$35-2 
26.8 
26. 7 
19- 7 
17. 6 
13. 7 



26. 9 
26. 2 
22. 4 
24. 6 
26.6 
23 3 



Examination of the table brings out some striking 
differences among the banks. All but two of the banks 



6158- 



267 



National M o n et ar y Commission 

increased their loans, but only in the case of the First 
National and the National City was the increase at all 
considerable. The other banks do not seem to have 
been rendering anything like that assistance which their 
resources would have permitted. The two largest banks 
(the City and the Bank of Commerce) increased their 
cash holdings and one of them its reserve ratio. Making 
every allowance for the effects of the average system, the 
conclusion can not be escaped that these two banks were 
not doing their utmost to relieve the situation. Changes 
in reserves and reserve ratios of the six banks were not 
very great, except in the case of the First National Bank. 
Although it received over $9,000,000 from the Govern- 
ment between. October 19 and October 31, its reserve 
was reduced nearly $7,000,000 during the week ending 
October 26, and at the same time its reserve ratio had 
dropped from 31.5 per cent to 22.4 per cent. The loss 
of cash for the six banks taken together was only 
$7,500,000, but that of the First National alone was 
$6,900,000. When it is remembered that the actual 
situation of the banks was less satisfactory than the 
average showing of the bank statement, it can readily be 
realized that the reserves of particular banks may have 
been seriously depleted at this time, while those of others 
were, perhaps, still above legal requirements. 

The explanation of this seemingly unfavorable showing 
of the First National Bank is in every way creditable to 
its management, while at the same time it illustrates the 
way in which failure to issue clearing-house loan certifi- 
cates at the beginning of a crisis may hasten general 



268 



Crises Under National Banking System 

suspension. As we have already seen, demands for cur- 
rency were made up>on New York from all parts of the 
country, including the other central reserve cities, as 
soon as the troubles of the Knickerbocker Trust Com- 
pany became known. To some extent outside banks 
directed shipments to be made against their balances 
with New York banks, but more largely the demand was 
for immediate liquidation of call loans and the shipment 
of the money received in payment therefor. At the 
same time the New York trust companies were reducing 
loans upon a wholesale scale. This double liquidation 
of loans could not be carried very far unless additional 
loans were made by the New York banks. It would 
simply have forced borrowers into insolvency. The 
clearing-house banks did shoulder this burden, but on 
account of the delay in the issue of loan certificates it 
was not distributed among the banks with any regard to 
their available resoiu-ces. 

Banks with relatively large New York trust company 
deposits or numerous correspondents in the West and 
South were subject to the greatest demands for cash and 
for the liquidation of loans. When the outside banks and 
the trust companies called their loan-s, brokers, to whom 
call loans are principally made, immediately resorted to 
the banks carrying their regular accounts, and the banks 
felt under obligation to afford them accommodation so far 
at least as it could be shown to be absolutely necessary. 
It naturally followed that the particular banks which 
happened to have a relatively large number of such 
accounts were obliged to lend heavily and to provide the 



269 



National M on et ar y Commission 

means for paying the loans that had been called. In some 
instances the loan called would have been made to a broker 
whose account was with the reserve agent of the interior 
bank which had ordered its liquidation. In that case 
the New York bank would be obliged to shoulder the loan 
itself and to ship the cash, taking it from its own reserve. 
In other instances the loan may have been made for an 
outside bank by some other New York bank. In that 
case, if the broker's account happened to be with the New 
York bank mentioned in the first instance, its loan to the 
broker would tend to create an unfavorable balance 
against it at the clearing house. The reserve agent call- 
ing the loan for the outside bank would thus secure the 
means of payment from that member of the clearing house 
which assumed the loan for the broker. It might thus 
easily happen that while some banks were losing very little 
cash and making few new loans, others would be rapidly 
expanding loans and quite as rapidly paying out cash 
from their reserves. This seems to have been the situation 
on October 26. Now, if loan certificates had been issued 
earlier in the week it would have been possible for a 
bank in the position of the First National to escape the 
unpleasant necessity of strengthening other banks upon 
which demands both from correspondents and from brokers 
happened to be considerably less than those made upon 
itself. On account of the delay in issuing loan certificates 
there were, therefore, greater differences in the condition 
of the banks at the close of the week ending October 26 
than would otherwise have been the case. Finally, if 
the issue of loan certificates had been still further delayed 



270 



Crises Under National Banking System 

it is clear that suspension would not have been prevented. 
Some of the banks whose reserves were being depleted 
would have been forced to contract loans in a wholesale 
fashion. Disastrous failures would have occurred among 
borrowers, the solvency of the banks would have become 
doubtful, and runs would have forced on suspension just 
as was the case in 1857. 

On October 26 clearing-house loan certificates were at 
length authorized, thus enabling the banks to meet the 
local situation, and to an even greater extent than in the 
past they served this purpose effectively. For the week 
ending October 26 the bank statement showed a loan 
increase of only $10,800,000, but during the next week it 
was $60,700,000, and for the week ending November 9 
$38,900,000, a total of over $110,000,000 for three weeks. 
This great increase in loans was partly responsible for the 
large reserve deficit which on November 2 was $38,ooo,ooOj_^ 
and on November 9, nearly $52,ooo,oo(y ^On both these 
dates the reserve deficit would not have been more than 
half what it was but for the increase in deposit liability 
through loan expansion. In adopting this policy with 
reierence to loans the banks were pursuing a course which 
was eminently wise and proper and in accord with the 
requirements of the situation. But, as has so often been 
observed in previous chapters, the responsibilities of the 
New York banks do not end with loans and the local situa- 
tion. If the banks resort to arrangements which make it 
possible for them to extend credit to borrowers, they ought 
also at the same time to agree upon arrangements which 
may be expected to remove the necessity for suspension. 



271 



National Monetary Commission 

Particularly is this true when, as in 1907, the banks have 
received enormous amounts of money from the Govern- 
ment, 

Even if the banks had resorted to the use of loan cer- 
tificates at the outset of the crisis it is highly improbable 
that suspensions would have been escaped. An important 
change had taken place in the attitude of the banks regard- 
ing the use of loan certificates. In 1890, it will be recalled, 
the Bank of Commerce passed resolutions urging the 
advisability of taking out certificates in order to grant 
needed accommodation to the business community. There 
was then apparently a widespread feeling among bankers 
that to resort to certificates was an indication of weakness. 
Since that time the pendulum has swung to the opposite 
extreme. The largest banks, including those in the 
strongest condition, hastened to take out certificates, and 
they became immediately almost the sole medium for the 
settlement of balances between banks. One important 
bank met a large unfavorable balance with cash on Mon- 
day, October 28, but, finding that it stood alone, did not 
repeat the experiment. During the last five days of Octo- 
ber 84 per cent of clearing-house balances were settled in 
certificates, and in November practically all payments (96 
per cent) were settled in this way." Whether the same 
course would have been pursued if the certificates had been 
issued at the outset, is not certain, but if so, suspension 
would probably have followed. It was inevitable when 
banks which had seized the opportunity to strengthen them- 
selves afforded by the delay in issuing the certificates fol- 

oSee Appendix, Note J, p. 431. 
272 



Crises Under National Banking System 

lowed up this selfish action by their use in the settlement of 
balances. Experience with the certificates in 1907 again 
illustrates the ineffectiveness of this device when shorn of 
its essential and original complement, an arrangement for 
equalizing reserves. Recalling the course of events in 1873, 
it can not be questioned for a moment that suspension would 
not have occurred had similar action been taken in 1907, 
nor would agreement by all the clearing-house members 
have been necessary. The six large banks acting in con- 
cert could have sustained the local situation by making 
loans and at the same time could have supplied the 
demands of outside banks for money. Had that course 
been followed, alarm would have been speedily allayed in 
the country at large, as it was already being allayed in 
New York City before the discreditable step of restricting 
payments was taken. 

Unfortunately there seems to be distinctly less unwilling- 
ness among bankers to resort to suspension than was the 
case twenty or thirty years ago. It may be attributed in 
part to the growing tendency since 1893 to look to changes 
in legislation alone as a remedy for financial ills. It 
seems also to be in part the result of a feeling common 
among New York bankers that they can not reasonably be 
expected to remit funds which are the proceeds of loans 
made in the New York money market by outside banks 
and liquidated in an emergency. Some bankers seem to 
have felt that it was entirely proper to refuse to ship cur- 
rency in such cases, and it is in connection with these loans 
that they have taken the first step in restricting payments 
in successive crises. It should be remembered, however, 



273 



National Monetary C ommis s io 



n 



that responsibilities are incurred in return for the ad- 
vantages which accrue to the New York banks from their 
pecuhar position. London holds its commanding position 
because it is known that money lent there can be instantly 
recalled. Similarly, New York is not meeting the obli- 
gations of its position as our domestic money center, to 
say nothing of living up to future international possibili- 
ties, so long as it is unable or unwilling to respond to any 
demand, however unreasonable, that can lawfully be made 
upon it for cash. 

Finally, there can be little doubt that the seriousness 
of the general economic situation was greatly exagger- 
ated by observers in New York. For .years the possible 
ill effects of government activities designed to regulate 
corporations had been magnified beyond all reason in 
financial circles, and the idea was quite honestly held 
that the people generally cherished similar views. Mer- 
cantile and banking failures approaching in extent those 
of 1873 and 1893 were expected. The course of events, 
however, conclusively proved that general economic condi- 
tions were not unsound. During the week ending Novem- 
ber 2 there was but a single important banking failure, a 
San Francisco trust company, with deposits of $9,000,000, 
and, aside from the temporary closing of the National 
Bank of Commerce in Kansas City on December 5, 
there were no further important banking disasters during 
the last two months of the year, i. e., to the end of this 
period of financial strain.'* Notwithstanding the severe 

o Early in November there were a number of additional banking fail- 
ures in Oregon and California, and a month later came the failure of a 
national bank of medium size and an important banking firm in Pittsburg. 

274 



Crises Under National Banking System 

strain to which business generaUy was subjected in con- 
sequence of the restriction of payments by the banks, 
mercantile failures were not extraordinarily large in num- 
ber or in amount of liabilities. During October accord- 
ing to Dunn's Reports the amount involved in commercial 
failures was $27,400,000, contrasted with $10,553,000 in 
October, 1906, and $18,387,000 in 1903. In November, 
1907, liabilities were only $17,637,000, compared with 
$11,980,000 in the same month for 1906. Even more 
convincing evidence of the comparatively sound condi- 
tion of general business is afforded by the small number 
of railroad receiverships and by the short duration of 
general business depression following the crisis of 1907, 
contrasted with either 1873 oi" 1893. In all these re- 
spects, as well as in the immediate cause of the outbreak, 
the crisis in 1907 seems to have paralleled most closely 
that of 1884, though some of the conditions, such as the 
greater number of railway receiverships in 1884, tend to 
the conclusion that the situation was fundamentally 
more healthy in 1907 than in the earlier year. The most 
striking difference is that in 1907 the banks restricted 
payments, thus involving all branches of business in 
severe strain, whereas in 1884 the banks united quickly 
upon a common policy, and, acting wisely and boldly, 
escaped that discreditable measure. 

One of the unfortunate effects of suspension is the 
creation of seemingly conclusive evidence for its neces- 
sity. During the two months that elapsed before the 
restriction on cash payments was entirely removed an 
enormous amount of money was added to the amount in 



275 



National Monetary Commission 

circulation, but none of it was secured by the banks. 
Through gold imports, government deposits, additional 
issues of bank notes, and payments of cash by the banks, 
something like $300,000,000 was added to the amount 
of money in every-day use or in hoards. Furthermore, a 
vast amount of substitutes for money was set afloat in 
the community. It has been assumed that as much as 
this amount of money, perhaps more, would have been 
taken from the banks if they had not restricted payments. 
This view is, however, contrary to experience in every 
instance where banks have met the demands of depositors 
fearlessly in an emergency. Suspension increases enor- 
mously the propensity to hoard money ; it also makes more 
sluggish the movement of money which remains in actual 
use. We can not be absolutely certain that the New 
York banks would have been able to maintain payments 
until calm was restored; but the amount of money which 
went out of sight after suspension is no indication what- 
ever of the amount which would have been required to 
maintain cash payments. 

Summarizing the results of this analysis of the influ- 
ences which led to suspension in New York, it may be 
said that it came about primarily because no real effort 
was made to prevent it. It was directly due to uneven 
distribution of the reserves held by the New York banks 
and to the use of clearing-house loan certificates as the 
sole medium of settlement of balances at the clearing 
house. It was not because the available reserves of the 
banks were exhausted, nor was it because there was no 
prospect of replacing, at least in part, the outgo which 



276 



Crises Under National Banking System 

would have been incurred had an attempt been made to / 
maintain payments. The influences leading to suspen- 
sion have been considered in much detail because a quite 
different view of its causes has been widely accepted. 
An illuminating indication of the unsound principles upon 
which the policy of the banks was based appears in the 
address, already referred to, of the president of the New 
York clearing house, which is so significant that it may 
be quoted at some length : 

The clearing-house committee knew by experience that the dissipation 
of the New York banking reserve, upon which practically the credit volume 
of the nation rests, would alarm the nation, intensify the panic, and greatly 
prolong the period of recuperation. * * * New York bankers have 
been severely criticised because they did not more fully respond to the 
demands of country correspondents by shipping currency against balances. 
To have fully honored the demands that were pouring in from all sections 
of the country would have dissipated our banking reserve in a fortnight. 
How could it be replenished? Were the interior bankers sending currency 
to New York? What would have been the effect upon the country if the 
New York banking reserve had been entirely depleted? It would have so 
intensified the panicky feeling that widespread commercial disaster would 
have resulted. * * * The $53,000,000 deficit in our banking reserve 
occurred in less than ten days after the failure of the Knickerbocker Trust 
Company, and was caused by the shipment to interior institutions of the 
larger portion of that amount in that short time. We kept the door of 
our treasure house wide open until for the good of the whole country it 
became necessary to everywhere close it. It never was fully closed; cur- 
rency shipments continued in a restricted way throughout the panic, and 
a large number of our banks kept up their counter payments as usual.'* 

RESUMPTION DELAYED UNNECESSARII.Y. 

Additional money was secured and in large quantity, 
but it served no useful purpose, not even that of limiting 
the duration of suspension to a short interval. Cash 
payments were not completely resumed until the begin- 

a Commercial and Financial Chronicle, Oct. 10, 1908, Bankers' Conven- 
tion Section, p. 84 

277 



National Monetary Commission 

ning of January. For exactly two months, about twice 
as long as in 1873 or 1893, money was regularly bought 
and sold at a premium in New York. For this prolonga- 
tion of suspension there was not even a shadow or sem- 
blance of excuse. After the loss of $30,000,000 during 
the week ending November 2 the New York banks held 
a reserve of $224,000,000; on November 23 it had been 
reduced by only $9,000,000; and thereafter it increased 
week by week and stood at $251,000,000 at the time the 
currency premium disappeared. It is significant that 
the much smaller banking reserve of the Bank of England 
was reduced during the first two weeks of this period 
from £24,000,000 to £17,000,000 without the remotest 
thought of suspension being entertained by anyone, 
either in London or elsewhere. 

It is not a little surprising that American financial 
opinion was far from unfavorable to the banks, the sus- 
pension of which seems generally to have been thought 
unavoidable. This view is a natural and inevitable con- 
sequence of an entirely erroneous habit of thought in this 
country with reference to banking reserves. Before^ the 
establishment of the national banking system in 1863 
insufficient reserves were a constant source of weakness, 
though something had been accomplished after the crisis 
of 1857 through legislation and agreement among the 
banks. The national banking law required a certain 
minimum of reserve from banks entering the system, the 
percentage varying with the location of the bank. For 
a system composed of thousands of banks, large and small, 
this legislation was unquestionably wise, but under its 



278 



Crises Under National Banking System 

influence undue importance has come to be attached to 
the maintenance at all times and at all costs of a certain 
minimum ratio between reserve and deposit liabili- 
ties. On November 2, when the New York banks had 
$224,000,000, there was a reserve deficit of $38,000,000, 
and two weeks later the deficit was $54,000,000. The 
following table shows the reserve and the reserve de- 
ficiency of the New York banks during the period of the 
currency premium, which lasted from October 31 to 
December 31, inclusive. The statement for January 4 
being based upon rapidly rising reserve averages, prob- 
ably shows very nearly the actual condition at the time 
of resumption. 

[Expressed in millions.] 



Reserve 
held. 



Reserve 
deficiency. 



Oct. 26. 

Nov. 2. 

9- 

16- 

23- 

30- 

Dec. 7. 



Jan. 



>2S4. 7 
224. I 
219. 8 
218. 7 
2IS-9 
217. 8 
222. s 
226. 6 
233- I 
242. 6 

250. 6 



" Surplus. 



This reserve deficiency was indeed far greater than ever 
before, but the reserve ratio was at no time below 20 per 
cent, contrasted with 12.8 per cent on October 18, 1873.'^ 

o The available reserve was at that time less than 4^ per cent. See p. 55. 



279 



National Monetary Commission 

The reserve deficit was apparently regarded by bankers 
and the public as a sufficient reason for partial suspension 
and as evidence that everything had been done to the 
full extent of the power of the banks to relieve the situa- 
tion. Without exaggeration, this arithmetical ratio of 
reserve can only be adequately characterized as a sort 
of fetich to which every maxim of sound banking policy 
is blindly sacrificed. Even though the banks outside of 
New York manifested a still more slavish attention to 
reserve requirements, it remains true that the New York 
banks were primarily responsible because of their posi- 
tion as the central reserve banks of the country, and 
because they initiated the policy of restriction. 

THE CURRENCY PREMIUM. 

Aside from its longer duration, the currency premium 
in 1907 presents no peculiarities contrasted with 1873 or 
1893. Its course is given for each day in the following 
table, which was compiled by Prof. A. P. Andrew from 
data procured from various New York newspapers: '^ 



Oct. 31- 
Nov. I. 



Currency 


premium. 


High. 


Low. 


Per cent. 


Per cent. 


3 
3J^ 


2 

2 


3 

(6) 

3'A 


3 



oA. P. Andrew, " Hoarding in the Panic of 1907," Quarterly Journal of Economics, 
February, 1908. For similar tables for 1873 and 1893, see p. S7 and p. 187. 
6 Sunday. 



280 



Crises Under National Banking System 



Currency premium. 



High. 



Nov. 



13- 
14- 
15- 
i6. 
17- 
i8- 
19- 



25- 

36- 

27- 

28. 
29. 
30- 



13- 
14- 

15- 
16- 

17- 



Per cent, 
(a) 

4 

3 
3 

3 
4 
4 

3 

23^ 



Per cent, 
(a) 



W 



C) 



3 

2K 

3 

3J4 

2K 

iK 



(6) 






2H 




3H 




3 'A 




2y, 




2 


(6) 






2H 




I'yi 




2'A 




iV, 



(<^) 



(6) 



I'A 



C) 




(") 



o Election Day. 



b Sunday. 



c Thanksgiving Day 



(6) 



(^) 



(6) 



(") 



C) 



I J^ 

H 



National Monetary Commission 













Currency 


premium. 




High. 


Low. 


Dec. i8 ... .. 


Per cent. 


Per cent. 


19 - — _. .. 






20 _ __ 


H 


21 -- ._ 


22 ._ 


(a) • 


(a) 


23 


24 . .. .. ._ 






25 


C) 


(6) 


26 . . 


27 . 


K 
(a) 




28 .. .. .. _ 




29.. 








(0) 


30 .. .. 


31 .... . 


(^) 


(<=) 








1 




« Sunday. 


b Christmas. 


cNo 


premium. 





No estimate can be made of the amount of money 
which was brought into circulation from hoards "' by the 
currency premium, and the reader is referred to the dis- 
cussions of this subject in previous chapters for reasons 
tending to show that it would be likely to diminish rather 
than increase the available money supply. ^ 

FOREIGN EXCHANGE. 

The course of the foreign exchanges and the gold import 
movement were not unlike those in previous crises . During 
the week ending October 26 exchange rates had fallen 
rapidly owing to dear money and to the expectation of 

a About $25,000,000 of domestic money was supposed to have been 
bought by brokers in New York, but the extent to which it came from 
hoards is uncertain. See the Financial Panic in the United States by A. D. 
Noyes in The Forum for January, 1908, p. 302. 

6 See pp. 68 and 195. 



282 



Crises Under National Banking System 

increasing cotton exports; and on Friday, October 25,'^ 
exchange was at the gold import point. A blockade in 
exchange was threatened, but the example of an impor- 
tant New York bank in continuing and increasing its 
purchases of bills soon had the good effect of inducing 
purchases by other banks and exchange dealers. Gold 
engagements were announced at the beginning of the fol- 
lowing week when sight exchange was quoted at $4.8 2 >^ 
to $4.82^. During the week about $25,000,000 was 
engaged, and although exchange rates advanced to 
$4.87, far above the import point, indeed well above 
par, the gold engagements continued. On Monday, 
November 4, exchange advanced to the highest point of 
the month, $4,88^, well above the gold export point in 
normal times, and still gold imports continued upon an 
enormous scale. As was explained at length in the chapter 
on the crisis of 1893, the currency premium was the cause 
of the high rates quoted for exchange, but not the prin- 
cipal cause of the gold movement.* It was primarily due 
to an enormous increase in merchandise exports and a 
considerable falling off in imports. The gold was not 
secured to any considerable extent by means of borrowing 
in the London market. Contrasted with $373,000,000 
during the last two months of 1906, exports for the 
same period in 1907 were $411,600,000, while im- 
ports were $254,000,000 in 1906 and $203,000,000 in 
1907. The excess of merchandise exports in 1906 was 
only $119,000,000, while in 1907 it was no less than 

a Gold could have been engaged on Friday, October 25, if importers had 
been able to secure the necessary advances from the banks. 
&See p. 192. 

6158 — 10 19 283 



National Monetary Commission 

$208,000,000. As there were practically no finance or 
anticipatory bills to be liquidated, this sudden increase in 
the excess of exports provided the means of payment for 
the gold which was imported. The export movement of 
commodities was not checked, as shippers were able to dis- 
pose of bills drawn against commodities sold in foreign 
markets. In this one respect the situation was handled 
most satisfactorily in 1907, 

The amount of gold received in New York during 
November was about $58,000,000 and in December 
$38,000,000. This total of $96,000,000 was far greater 
than the amount imported during any other crisis in our 
history and affords further evidence of the ability of this 
country to secure additional supplies of gold in an emer- 
gency. This power will remain so long as our foreign 
trade is made up principally of imported luxuries and 
exported necessities. But, as we have already seen, no 
reliance was placed upon the prospective imports of gold, 
nor was the actual receipt of the gold made use of to 
cut short the period of suspension. Payments were not 
resumed until the cash holdings of the New York banks 
began to increase rapidly through the return of money 
from circulation in consequence of general business de- 
pression; until, in other words, outside banks manifested 
more confidence in the New York banks than they had 
in themselves. 

Although we made no use of the gold which was im- 
ported, its departure occasioned great disturbance in 
foreign countries. The Bank of England was obliged to 
advance its rate to 7 per cent, not to check gold exports. 



284 



Crises Under National Banking System 

but in order to secure payment from other countries of 
money which was due by them to the United States. 
London being the central money market of the world, if 
its rates had not advanced other coimtries would have 
made payments to the United States by drawing down 
London balances or by creating credits in London by dis- 
counting bills. The advance in the Bank-of-England rate 
caused other countries to remit to London a large part of 
the money which was due from them to this country '^ in 
payment for our exports. 

In New York much was made of the fact that large 
amounts of money continued to be shipped to interior 
banks throughout November and December. The fol- 
lowing table prepared by the clearing-house authorities '' 
shows that this was indeed the case: 



Week ending- 



Receipts from 
the interior. 



Shipments to 
the interior. 



Net loss. 



Oct. 26 

Nov. 2 . 

9 

16 

23 

30 

Dec. 7 

Total 



$4,544,500 
3, 644, 600 
2, 566, 300 
3.079. 700 
3. 555. 300 
2, 483,500 
4, 169, 900 



?i9, 556,800 

21, 930, 400 

15.963.500 
24. 730.500 
19, 083, 600 
13. 711,500 
15. 989, 200 



515,012,300 
18.285.800 
13.397. 200 

21, 650. 800 
15.528.300 
II, 228, 000 
11, 819, 300 



24, 043, 800 



130,965. 500 



106, 921, 700 



The significance of these large shipments requires some 
explanation. '^ Those of the first two weeks were offset by 
government deposits in New York banks, and as for the 

a For an illuminating account of the various influences at work in the 
London money market at this time, see Hartley Withers, The Meaning 
of Money, p. 292. 

^ Response of the Secretary of the Treasury to Senate resolution No. 33 
of December 12, 1907, Senate Doc. 208, 60th Congress, ist session, p. 215. 



285 



National Monetary Commission 

remainder they were simply the proceeds of commodities 
produced in the West and South which were exported to 
Europe. '' The gold which was imported did not belong 
to New York; New York was merely the channel through 
which bills of exchange went out and gold entered. If 
New York had attempted to retain this gold, the gold- 
import movement would have ceased entirely and at 
once. If 

SUSPENSION THROUGHOUT THE COUNTRY. 

Restriction of cash payments by the New York banks 
was the signal for similar action elsewhere, and by the 
close of the week ending November 2, partial suspension 
was general throughout the country. The extent to 
which suspension was carried can not be accurately 
determined. It varied in the different sections of the 
country and with different banks in the same place, 
and also from day to day by the same bank. The 
governors of some of the western States declared a succes- 
sion of legal hoHdays, though not in every case at the 
desire of the banks. This novel device was resorted to in 
Oklahoma, Nevada, Washington, Oregon, and California. 
The following proclamation issued by the acting governor 
of Oklahoma on Monday, October 28, will serve as an 
example: * 

Whereas, It appears to the undersigned acting governor of the Territory 
of Oklahoma that all of the leading cities of the United States, through 
their clearing-house associations, have entered into an argeement to pro- 
tect themselves against conditions which they are apparently unable to 
control, and by such concerted action are refusing to ship currency to 
country banks which have deposits with them or to honor the bills of 

a Commercial and Financial Chronicle, November 2, 1907, p. 11 18. 



286 



Crises Under National Banking System 

lading drawn upon the banks of such, or to pay checks of customers over 

the counters; and, 

Whereas, Such action makes it impossible for the banks of Oklahoma to 

meet the immediate demands upon them for currency to pay for the cotton 

and other products of the Territory; and. 

Whereas, Our banks appear to be in a solvent condition; therefore, be it 
Ordained, That a legal holiday extending from October 28 six days to 

November 2 be proclaimed. 

(Signed) Charles Filson, 

Acting Governor. 

More generally, as in the past, the banks simply "dis- 
criminated " in making payments." In Chicago, a central 
reserve city, it was reported^ on November i that "the 
banks stopped shipping cm-rency, for two or three days, 
to their correspondents South and West, but for the past 
day or two have resumed such remittances on a moderate 
scale in cases where the demand seemed imperative." 
From various reserve cities came similar reports, e. g., 
" in IndianapoHs and St. Paul the banks agreed to suspend 
temporarily the payment of money on checks, certificates 
of deposit, or drafts, except for small sums, and further 
for the present to furnish no money for bank correspond- 
ents." "In New Orleans the Associated Banks have 
limited currency payments to any one depositor for $50, 
except in cases where deviation from the rule seems 
necessary." Restriction was perhaps more complete in 
many cities than it was in New York,'' but that does not 
relieve the banks of the metropoHs of responsibility for 

o For examples of the recommendation of the policy of suspension by 
the banking officials of some of the States, see Appendix, Note K, p. 435. 

h Commercial and Financial Chronicle, November 2, p. 1 1 19. 

c For specific instances of the refusal of New York banks to cash checks 
drawn on them by other banks, see Senate Doc. 435, 60th Congress, ist ses- 
sion, pp. 6, 12, 14, 15, and 27. 



287 



National Monetary Commission 

having been the main cause of suspension. The reasons 
for this view, however, have been stated at length in 
previous chapters and need not be repeated." As in 1873, 
in many places resolutions were adopted by the banks 
setting forth the reasons for restricting payments and the 
peculiar arrangements which were being set up. In every 
instance the refusal to ship currency by the banks of the 
money centers, and particularly by those of New York, 
was said, and with truth, to have made suspension neces- 
sary. The following resolutions adopted by the banks of 
Atlanta, Ga., and Portland, Oreg., are appended as 
typical examples. The Atlanta Clearing House Associa- 
tion adopted the following resolutions on October 30:^ 

In view of the action taken by the New York Clearing House, and sub- 
sequently adopted by Chicago, St. Louis, Philadelphia, Cincinnati, New 
Orleans, Nashville, Birmingham, Baltimore, Louisville, Memphis, Mont- 
gomery, Mobile, and many other principal cities throughout the country, 
restricting the shipment of currency, and the restriction of other business 
to its proper channel, the Clearing House; therefore, be it 
• Resolved by the Atlanta Clearing House Association — 

1. That until further notice collections and bank balances be settled 
in exchange or clearing-house certificates. 

2. That checks drawn on the members of this association be paid through 
the Atlanta Clearing House, and correspondents and customers be requested 
to so stamp their checks. 

3. That payments against all aecounts, including certificates of deposit, 
be limited to $50 in one day, or $100 in one week (Monday to Saturday). 

4. That exception shall be made to the above in case of pay rolls, which 
shall be paid as follows: All denominations of $5 and over in clearing- 
house certificates, and all denominations of under $5 to be paid in cash as 
desired. 

Resolved further, That the manager of the Atlanta Clearing House Asso- 
ciation be instructed to give notice to the correspondents of the Atlanta 
Clearing-House banks that the above resolution is in effect on and after 
this date and until further notice. 

«See p. 126. 

& Commercial and Financial Chronicle, November 9, p. 1182. 



2S8 



Crises Under National Banking System 

The Portland (Oreg.) Clearing House Association 
adopted its resolutions on October 28 : ** 

Whereas, The banks of Portland have received telegraphic advices that 
all the principal clearing-house associations in the United States have 
decided to refuse to ship coin or currency against the deposit balances of 
their correspondents; therefore, be it 

Resolved, First, that the banks of the Clearing-House Association of 
Portland decline to ship coin or currency to their out-of-town corre- 
spondents. 

Second, that all checks, certificates of deposit or drafts of customers and 
out-of-town correspondents be paid only through the clearing house and 
in clearing-house funds. 

Third, that all items on out-of-town banks be taken only for collection, 
subject to payment in legal tender. 

Fourth, that the savings banks of the city of Portland be instructed to 
demand notice of withdrawal of funds. 

Fifth, that this action be and remain in force as long as the leading cities 
of the United States maintain a similar policy. 

The following resolution was also adopted: 

For the purpose of enabling the banks, members of the Portland Clearing 
House, to afford proper assistance to the mercantile community, and also 
to facilitate the inter-bank settlements resulting from their daily ex- 
changes, be it 

Resolved, That any bank in the clearing house may at its option deposit 
with the loan committee of the clearing house an amount of bills receiv- 
able, bonds or other securities, to be approved by said committee, who 
shall be authorized to issue thereon to said depositing bank certificates of 
deposit, bearing interest at 7 per cent per annum, in denominations of 
$5,000, to an amount equal to 75 per cent of such deposits. These cer- 
tificates may be used in the settlements of balances at the clearing house 
for a period of thirty days from the date thereof, and they shall be received 
by creditor banks during that period, daily, in the same proportion as 
they bear to the aggregate amount of the debtor balances paid at the 
clearing house. The interest which may accrue upon these certificates 
shall at the expiration of thirty days be apportioned among the banks 
which shall have held them during the time. 

The securities deposited with said committee as above named shall be 
held by them in trust as a special deposit, pledged for the redemption of 
the certificates issued thereupon. 

The committee shall be authorized to exchange any portion of said 
securities for an equal amount of others, to be approved by them at the 

a Commercial and Financial Chronicle, November 9, p. 1182. 
289 



National Monetary Commission 

request of the depositing bank, and shall have power to demand additional 
security, either by an exchange or an increased amount, at their discretion. 

Clearing house loan certificates were issued in a far 
greater number of cities than in previous crises. Nearly 
60 of the 106 clearing houses in the country made use of 
the device, and with the exception of Washington all 
cities of the first rank were in the number. <^ In more than 
twenty instances the use of certificates 'was not confined 
to payments between banks. They were issued in small 
denominations for payment to -individual depositors. 
This policy was wise after payments had been restricted. 
They were perhaps the best possible substitute for money 
for local requirements. Certainly it is better to use loan 
certificates in this way than to refuse depositors any 
available means of payment. In New York and else- 
where bankers have been inclined to take credit to them- 
selves because they had confined the use of certificates to 
payments with each other. But by this means the form 
and not the substance of cash payments is preserved. 
It is little more than straining at the proverbial gnat at 
a time when depositors are not being paid cash on demand. 

Upon the whole, pay roll difficulties do not seem to 
have been so serious as in 1893. In some parts of the 
country the banks seem to have supplied very generally 
the requirements of their depositors for this purpose. It 
may also be presumed that as a result of past experience 
the banks and the business community are becoming 
expert in devising quickly various substitutes for cash 
which will serve for local purposes. 

flPor a detailed account of the issue of loan certificates during this 
crisis, see Appendix, Note K, pp. 438-452. 

290 



Crises Under National Banking System 



THE DOMESTIC EXCHANGES. 

The dislocation of the domestic exchanges can not, how- 
ever, be prevented by the various substitutes for money 
which have only a local credit, and would seem to have 
been no less complete and disturbing in its effects than on 
other occasions. The course of exchange was, however, 
subject to somewhat different influences, and quoted rates 
followed a course quite unlike that already considered in 
the case of the crisis of 1893. This may be readily seen 
if the following table is compared with the similar table 
for 1893 on page 204: 

Table showing the rates of New York exchange in the various parts of the 
country between October 26 and December 15, 1907. 



Boston. 



Philadelphia. 



Oct. 26 

Nov. 2 

9 

16 

23 

30 

Dec. 7 

14 

Oct. 26 

Nov. 2 

9 

16 

23 

30 

Dec. 7 



25 cents discount- 
25 cents discount- . 
30 cents premium. 

$1.50 premium 

$2 premium 

Par 

25 cents discount. . 
30 cents discount.. 



Par. 

$2.50 premium. 

$S premium. 

$2.50 to $4 premium. 

$2 to $3 premium. 

$1.50 to $2.50 premium. 

$2.50 premium. 



Chicago. 



St. Louis. 



50 cents discount $1 discount. 

$1 to $i.2S discount Par. 

Par to $1.25 )?3-So premium. 

7S cents premium $7 premium. 

$1 premium $7 premium. 

$1 premium $4 to $5 premium. 

Par \ $2.50 premium, 

Par j $4.50 premium 



291 



National Monetary Commission 



Cincinnati. 



Kansas City. 



Oct. 


26 


Nov 


2 




9 




16 




23 




30 


Dec. 


7 




14 



25 cents discount 

S o cents discount 

Par to 25 cents discount- 
Par to 60 cents discount - 
Par to 60 cents discount. 

$1 premium 

30 to so cents discount- - 
so cents discount 



25 cents premium. 
25 cents premium. 
$1 premium. 
$1 premium. 
$1 premium. 
$1 premium. 
$1 premium. 
$1 premium. 



New Orleans. 



Oct. 26. 

Nov. 2. 

9- 

16. 

23- 

30- 
Dec. 7 . 

14- 



$1 discount. 

$1.50 discount. 

82.50 discount. 

$3 discount. 

Par. 

Par. 

Par. 

Par. 



The rates in the table for October 26 may be taken as 
ruling within normal limits, as they were not very differ- 
ent from those of the weeks immediately preceding. 
Before the close of the week ending November 2, the 
banks of New York and other cities had issued clearing- 
house loan certificates and had also restricted payments, 
and the premium on currency had made its appearance. 
It will be observed that no great change took place im- 
mediately in exchange rates, and that it was not until the 
middle of November that rates in many cities reached 
an abnormal level. At no time did rates reach such ex- 
traordinarily abnormal points as the rate of $30 discount 
per $1,000 in Chicago in 1893. It should be noted also 
that exchange was very generally at a premium, whereas 
in 1893 it was below in quite as many instances as above 
par. 

292 



Crises Under National Banking System 

There is no part of our banking machinery which has 
received so httle elucidation as that of the domestic 
exchanges. Even for normal times the subject is obscure, 
and the writer therefore ventures upon an explanation 
of its course during a period of crisis with hesitation, 
and he is by no means confident that important consid- 
erations may not have been overlooked. 

As in the case of foreign exchange, domestic exchange 
rates fluctuate within limits fixed by the cost of shipping 
money, and also, in the case of cities distant from New 
York, by the loss of interest while currency is in transit. 
The quoted rates apply principally to business between 
banks, the rates being determined by demand and supply. 
A Boston bank, for example, receives from its customers 
New York drafts and also checks drawn on banks in New 
York and its vicinity. All these items will serve to build 
up its balances in that city. On the other hand, its 
depositors have been sending out checks, many of which 
will in the course of time reach New York and reduce 
its balances there. The Boston bank will also have 
received from banks of New York and from banks else- 
where items for collection in its vicinity, and remit- 
tance in ordinary course will be made by it in New York 
funds. Similarly it has sent away items for collection to 
banks in other cities upon which it expects a like remit- 
tance. As a result of all these various influences the 
balances of the Boston bank may either increase or de- 
crease. If they increase it may be ready to sell exchange 
to other Boston banks whose balances are running low. 
It may also happen that the bank is desirous of reducing 



293 



National Monetary C ommis s io 



n 



its New York balances, and in that case it will also appear 
as a seller of exchange in the market. 

Now, if in the course of a crisis clearing-house loan cer- 
tificates become the principal or sole medium of payment 
between banks, it may well happen that a bank will be 
unwilling to sell exchange unless it is unusually well sup- 
plied with New York funds. By the sale of exchange it 
can at best only secure a favorable clearing-house balance, 
which will be settled in loan certificates, and if this bal- 
ance should be unfavorable it can meet it by taking out 
certificates on its own account. Kach bank, therefore, 
to a greater extent than in normal times, is obliged to 
rely upon itself for means of payment in New York. The 
loan certificate does indeed yield a return or involve an 
expense of 6 or 7 per cent, while the return on New York 
balances is only 2 per cent. This advantage does not, 
however, seem to have induced the banks to sell exchange 
as freely as in normal times. 

This is, however, not the only disturbing influence. 
The Boston bank may have remitted to New York upon 
items collected by it for other banks — let us say those of 
Philadelphia — but it may happen that the Philadelphia 
banks delay or even discontinue remitting to New York 
upon items sent to them for collection by banks of Boston 
and other cities. The Boston bank can then no longer 
rely upon what would normally serve to build up its own 
New York balances. It will be simply acquiring a mass 
of unavailable credits at scattered points throughout the 
country. The supply of New York exchange which it 
might have been willing to sell is consequently dimin- 



294 



Crises Under National Banking System 

ished, and the premium on exchange must rise to a point 
at which it will tempt some of the banks to sell exchange, 
even though it intrenches upon their balances with agents 
which are available for reserve. 

The premium would naturally be especially high in 
those cities where the banks were most unwilling to reduce 
their New York balances. Philadelphia seems a case in 
point, as its deposits with reserve agents, which were 
$30,995,000 on August 22, were reduced to only $29,389,000 
on December 3. At that time the premium on currency 
in Philadelphia ranged from $1.50 to $3 per $1,000. It 
is, therefore, a reasonable conclusion that the banks were 
strongly disinclined to make use of their New York bal- 
ances. In a few cities it is probable that the premium 
reached a high level because the banks had exhausted their 
New York balances. St. Louis may be mentioned as a 
probable example. Being a central reserve city, its banks 
would naturally have only such balances in New York as 
normal business requirements made necessary. The dis- 
location of exchange elsewhere or the course of payments 
between New York and St. Louis may have combined to 
produce such a balance of payments as would have re- 
quired currency shipments if the St. Louis banks had 
remitted promptly to New York. 

The extent to which banks in different cities delayed or 
refused to remit to New York on items collected by them 
for other banks can not be determined. Banks in one 
city, very naturally and honestly, were inclined to lay the 
blame upon banks elsewhere. The banks in other places, 
however, may not have been able to secure payment of 



295 



National Monetary Commission 

the items sent to them for collection from other banks in 
their locahty with the usual promptness. When every 
allowance has been made, however, there can be no ques- 
tion that banks in certain cities, in these as well as in other 
matters, adopted a policy wholly designed to strengthen 
themselves regardless of consequences. 

The general prevalence of the premium on New York 
exchange is, as we have seen, accounted for in part by the 
Use of clearing-house loan certificates in settling balances 
between banks and by the delay in remitting in New York 
funds upon items collected for other banks. It seems 
probable, however, that, taking the country as a whole, 
the course of payments was favorable to the New York 
banks. At the beginning of November withdrawals for 
crop-moving purposes have in recent years begun to 
diminish, except to the South, and movements of money 
from eastern centers are distinctly in favor of New York 
at that season of the year. If this were indeed the case 
in 1907, it affords still another reason for thinking that the 
New York banks might have met the crisis successfully 
without restricting payments. They would probably 
have been obliged to meet only withdrawals arising from 
lack of confidence and not real needs for crop-moving 
purposes, such as would have increased the difficulties of 
the situation had the crisis begun at the beginning of 
September. 

finally, it should be noted that the restriction of cash 
payments to depositors and the currency premium seem 
to have increased the demand for New York exchange. 
Only in that city was it possible to buy any considerable 



296 



Crises Under National Banking System 

quantity of money. Many banks in various parts of the 
country purchased gold and currency at a premium in 
New York and, instead of drawing on their own balances, 
then entered their home market as purchasers of exchange 
which was remitted in payment. 

In the few instances where exchange was below par 
the currency premium was a more direct influence; but 
exchange could not have dropped to the low figures re- 
corded in 1893 in the case of Chicago, because the Chi- 
cago banks in 1907 did not maintain payments among 
themselves as they had done on previous occasions. 
Exchange was at a discount only in those cities where 
the course of payments was so strongly against New 
York that practically all the banks found their balances 
in that city increasing. Chicago might have been ex- 
pected to belong to this group, but its banks made exten- 
sive use of bills derived from grain exports to secure gold 
which was shipped directly to them. In general, exchange 
was at a discount, or at par only, in the Southern States, 
the banks of which, by means of cotton sales, are nor- 
mally in position to draw money from the northeastern 
part of the country during the late autumn. 

In conclusion, it should perhaps be pointed out that 
the quoted rates of exchange were often without much 
significance. The ordinary course of dealings was so 
completely disorganized in many places that the rates 
were purely nominal, representing little or no actual 
transactions. 

LOAN CONTRACTION. 

From this analysis it will be evident that rates of 
domestic exchange might have been somewhat less ab- 

297 



National M on et ar y Commission 

normal if the banks had been prepared to make more 
use of their balances with reserve agents in New York. 
The rates in themselves, however, were of comparatively 
slight general importance; they were simply symptomatic 
of disturbed conditions and did not measure the extent 
of the disturbance. The dislocation of the domestic ex- 
changes exercised an unfavorable effect upon business 
activities, because it increased the general lack of confi- 
dence, and, more directly, because of the delay which it 
both created and encouraged in remittances of all sorts 
between different parts of the country. When items for 
which the banks would ordinarily give immediate credit 
are taken for collection only, and when these collections 
are delayed, it is obvious that a greater amount of ac- 
commodation in the form of loans will be required to 
carry on a given volume of business than is needed in 
normal times. The restriction of payments by the banks, 
with its consequent dislocation of the exchanges may, 
therefore, be regarded as partially responsible at least for 
the scarcity of loans to which the trade journals very 
generally attributed the depression in trade that marked 
the closing months of the year. Only on the supposition 
that the demand for loans had become greater can com- 
plaints of the business community of inability to secure 
loans be satisfactorily explained since the extent to which 
loans were reduced by the national banks at any rate 
was insignificant — far less than in 1893. Between August 
22 and December 3 loans were reduced from $4,709,- 
000,000 to $4,624,000,000 — only $85,000,000 — almost ex- 
actly 2 per cent. While the returns of the national banks 



298 



Crises Under National Banking System 

provide a far less certain indication of banking operations 
than formerly, on account of the rapid growth of state 
credit institutions, this contraction was so much less than 
in 1893 that it seems fair to assume that positive loan 
contraction was a comparatively slight disturbing factor. 
There were, it is true, wide variations between different 
cities and sections of the country, but on the Pacific 
coast where contraction was most drastic loans were re- 
duced only 7 per cent. In particular cities, especially 
those in which there were banking troubles, such as 
Kansas City and San Francisco, loans were reduced to 
an extent which must have been positively disturbing, 
but upon the whole in this respect the banks made a 
better showing than ever before. The following table 
shows the changes in loans in the various cities and sec- 
tions of the country (not including the cities which ap- 
pear separately) between August 22 and December 3, 1907: 

[Expressed in millions ] 



Boston 

New England States 

New York City 

Philadelphia 

Pittsburg 

B altimore 

Eastern States 

Savannah 

New Orleans 

Southern States 

Cincinnati 

Cleveland 

Indianapolis - . 

Chicago 



Loans and discounts 



Aug. 22. Dec. 3 



»i67. 
229 
712. 
J77- 
147. 

56. 

693- 

2. 

26. 
527- 

SS- 

54- 

2S- 
231- 



7 


$169. 





260. 


I 


77S 


2 


178. 


7 


139 


S 


57 


2 


679. 


s 


2. 


6 


27. 


9 


496 


I 


52 


2 


52 


3 


21 


. 2 


320 



6158— 1( 



299 



National Monetary Commission 



Detroit 

Milwaukee 

Minneapolis 

St. Paul .. 

Kansas City 

St. Louis 

Middle Western States 

Omaha 

Denver 

Western States 

Seattle 

Portland 

San Francisco 

Pacific States 



Loans and discounts. 



7 


$23 


I 


32 


.8 


41 


• 4 


23 


.6 


26 


.8 


114 


■ 4 


676 


.8 


22 


.6 


21 


■ 4 


245 


. 2 


17 


■ 4 


9 


.8 


46 


■ 7 


149 



Nowhere throughout the country was there any con- 
siderable increase in loans except in New York, where 
loans increased by $63,000,000 — from $712,000,000 to 
$775,000,000. In every period of financial strain hitherto 
the New York banks had been able to contract loans 
somewhat. Explanation of the different result in 1907 is 
simple. The trust-company situation compelled them to 
liquidate loans wherever possible, and the outside banks 
also followed the same course. These two groups of 
lenders more than exhausted the possibilities of contrac- 
tion in New York, and a part of their loans had to be 
taken over by the clearing-house banks to prevent a 
general disaster. We have already seen that call loans 
were particularly favored both by trust companies and 
the outside banks. Even in 1873 the clearing-house 
banks were able to reduce loans of that kind ® relatively 

oSee p. 84. 



300 



Crises Under National Banking System 

little, and it might naturally be expected that still less 
contraction would have been feasible in 1907. The fol- 
lowing table shows that such an expectation would be 
entirely in accord with the facts of the situation: 

(Expressed in rnillions ] 



On demand, paper with one or more individual or firm names. 
On demand, secured by stocks, bonds, and other personal se- 
curities 

On time, paper with two or more individual or firm names 

On time, single-name paper (one person or firm), without other 
security 

On time, secured by stocks, bonds, and other personal securi- 
ties, or by real estate mortgages oc other liens on realty 

Total 



Aug. 22 
1907. 




Among the many lessons which may be drawn from a 
study of the experiences of the national banks during 
crises, the entire absence of liquidness in call loans, so 
far as the New York banks are concerned, is the most 
certain and by no means the least important. Out of a 
total loan increase of $63,000,000, call loans account for 
$54,000,000; and, furthermore, time loans with collateral 
security, which are largely of stock-exchange origin, ac- 
count for another $4,000,000. The only kind of loan 
which was reduced at all was one of the varieties of com- 
mercial loans — the time loan on "paper with a single 
individual or firm name." Commercial loans can be re- 
duced somewhat in New York, because that market is 
resorted to by many outside borrowers, and they can be 
thrown back upon their local banks. Moreover, with any 
decline in business activity, the demand for commercial 



301 



National M on et ar y Commission 

loans naturally falls off unless it is counteracted by the 
dislocation of the domestic exchanges. Call loans, on the 
other hand, are local New York loans, and consequently 
the amount of them which must be made by New York 
banks increases whenever other lenders retire from the 
market. The opinion may be ventured that a New York 
bank would be in a better position to meet an emergency 
if all its loans were upon commercial paper than it is 
under existing circumstances, though of course it would not 
then be in position to slide along just above the 25 per 
cent requirement in normal times. 

Another cause of disturbance in connection with loans, 
independent of their volume, is the vast amount of shift- 
ing of loans which takes place in consequence of the 
inability of note brokers to dispose of commercial paper 
during a crisis. It would probably be under rather than 
above the mark to assume that this business is reduced 
very much more than one-half in an emergency like that 
of 1893 or 1907. Borrowers are forced to resort almost 
entirely to their own banks, just as was the case with the 
stock brokers whose loans were liquidated by trust com- 
panies and outside banks in New York. This shifting of 
loans involves much strain and uncertainty, and in many 
instances it is not possible to carry it out at all." 

It would seem, then, that business distress from lack of 
credit facilities was due to at least three influences : ' The 
restriction of cash payments by the banks increased the 

oTo this circumstance may perhaps be attributed the relatively numer- 
ous instances of failure or suspension among concerns of large size which 
was a notable feature of the crisis of 1907. See the analysis of failures in 
1907 in Dun's Review for January 11, 1908. 



302 



Crises Under National Banking System 

requirements of borrowers; the supply of loans was reduced 
by a moderate amount of contraction ; and the shifting of 
loans involved considerable uncertainty and inconven- 
ience. From the two last-mentioned causes it is probable 
that no serious difficulty would have been experienced by 
borrowers aside from those whose requirements were 
ordinarily placed through note brokers. One of the satis- 
factory features of our system of local independent banks 
is that they do not press hardly upon their regular 
customers in emergencies. Those who place paper only 
through note brokers naturally suffer, because the banks 
take such paper either to employ temporarily idle funds 
or as a peculiarly liquid resource, a sort of quasi-reserve. 
For such borrowers the banks feel no responsibility; but 
with the inevitable increase of such borrowing, on account 
of the increasing size of the reproducing and distributing 
unit, there is coming to be a greater need somewhere in 
our banking system for a reserve of lending power for 
emergencies. 

THE CONDITION OF THE BANKS. 

Following the method adopted in the investigation of 
previous crises, an analysis of the returns of the national 
banks to the Comptroller of the Currency just before and 
after the crisis of 1907 may be expected to throw light 
upon the course of events. Unfortunately, the statistical 
data is far from satisfactory. The first of the two returns 
was made on August 22 — about two months before the 
crisis, and the second, on December 3, came after the 
worst of the panic was passed. It was because the 



303 



National M onetary Commission 

returns in 1873 were made at more significant dates that 
particular attention was given to this side of the subject 
in the treatment of the crisis of that year. For 1907 it is 
necessary to assume that no great change had taken place 
in the condition of the banks between the end of August 
and the middle of October, an assumption which, judging 
from the weekly bank statements in New York, Boston, 
and Philadelphia, is not far from the facts of the actual 
situation. It would, however, be somewhat hazardous to 
draw conclusions if it were not that the same tendencies 
are disclosed which were so clearly manifest both in 1873 
and in 1893. 

As in former periods of crisis the reserves of the banks, 
taken as a whole, were not made use of to any considerable 
extent. On August 22 the banks held $701,600,000, and 
on December 3, $660,800,000 — a loss of only $40,800,000. 
If the holdings of the notes of other banks are included, 
this loss is reduced to only $31,400,000. This cash loss 
can be more than matched on many occasions when con- 
ditions were entirely normal, e. g., between August 25 
and November 9, 1905, when the reserves of the banks fell 
off more than $43,000,000. By means of loan contrac- 
tion, the loss in cash, and the diminution in indebtedness 
between the banks, net deposits were reduced from 
$5,256,000,000 to $4,629,000,000, and there was a slight 
increase in the proportion of cash held, which advanced 
from 13.35 per cent to 13.45 per cent. This slight increase 
in the reserve ratio was entirely in accord with precedent, 
and its explanation is to be found in changes in the condi- 
tion of the country banks, which are shown in the following 
table: 

304 



Crises Under National Banking System 

[Expressed in millions.] 



Aug. 22. 



Dec. 3. 



Decrease. 



Loans 

Net deposits 

Cash reserve 

Percentage of reserve 

Net deposits with reserve agents. 



62, 401. o 

52, 627. o 

$199-6 

7.6 

$410. o 



62,324. o 

52,485.0 

$246. o 

9.9 
$356.0 



$770 

$142. o 
«$47.6 



<>■ Increase. 



The increase of $47,600,000 in reserves of this group of 
banks exceeded by $6,800,000 the total loss in reserves 
of the banks taken as a whole. This increase, as well as 
that in reserve ratio, will cause no surprise to the reader 
of the previous chapters of this investigation. At the 
time, however, it was apparently regarded by many as 
something unusual, and country banks were accused of 
hoarding and the blame for suspension was laid at their 
door«. There is no reason to believe that country banks 
were endeavoring to hoard the money which they with- 
drew from their reserve agents at the beginning of the 
crisis. They needed additional supplies of cash if they 
were to meet the demands of their own depositors. But 
after the New York banks suspended and suspension 
became general they naturally held with a tight grip all 
the money which they had in their possession at the 
moment and also very naturally endeavored to extract 
more from their reserve agents. The withdrawal of 
money was entirely in accord with what the teachings of 
past experience ought to have led reserve agents to expect 
and to be in readiness to meet. In the future, as in the 
past, whatever the causes of financial strain, country 
banks will withdraw money in order to strengthen their 



; 



305 



National M o n et ar y Commission 

reserves. These demands will be particularly large until 
the New York banks pass through a crisis triumphantly, 
meeting every demand for payment. The crisis of 1907 
was the most favorable opportunity which the city banks 
have had since the establishment of the national banking 
system. Outside of New York and a few other cities 
there were almost no failures either of national or of 
state banking institutions to cause alarm to spread and 
be renewed at intervals, as happened in 1893. The gen- 
eral business situation, moreover, was comparatively 
sound, and the means for securing additional supplies of 
money were not entirely lacking, as was the case in 1873. 
It requires no gift of prophecy to foresee a general scramble 
to get money from New York on the next occasion of 
financial strain unless it is fortunately deferred to another 
generation to whom the course of events in 1907 will be 
merely a vague tradition. 

Some observers, particularly in other countries, have 
expressed the view that the banking troubles of 1907 were 
the result of deep-seated moral causes, assuming that, 
during the years immediately preceding, the many dis- 
closures of corporate greed, mismanagement, and wild 
financiering had created distrust of the banks. In the 
case of the early runs upon New York banks and trust 
companies there is, perhaps, some ground for this opinion. 
It does not, however, apply to the banks in general or to 
the withdrawal by country banks of their deposits with 
reserve agents. In the absence of branch banking, the 
banks in each place are, with few exceptions, owned as well 
as managed by local people. The misdeeds, real or fan- 



306 



Crises Under National Banking System 

cied, of trusts and railways can not be supposed to weaken 
the confidence of the people in those of their neighbors 
who happen to be engaged in banking. It might, however, 
be thought that the withdrawal of their deposits by coun- 
try banks was due to the distrust of the large city banks 
were it not that the country banks in this matter were 
simply following the course which they had taken in pre- 
vious crises and which their situation made necessary. 
Moreover, after the crisis money was returned to the city 
banks as in former years, though there had been no 
change in the management of these banks such as ftiight 
have restored confidence had it been lost. The country 
banks may have been influenced in part by unreasoning 
fear, and to a greater extent by past experience of the 
difficulty of obtaining money from the reserve banks in 
times of crisis ; but the principal reason was the inadequacy 
of their cash reserves to meet extraordinary requirements. 
The fact that the country banks held more cash in De- 
cember than in August is no indication whatever of what 
their position would have been if the banks in New York 
had not inaugurated the policy of suspension. Surely it 
can not be held that the country banks should not with- 
draw any money from their reserve agents in an emer- 
gency! And after suspension, the country banks in hold- 
ing their reserves intact were following a course not unlike 
that of the city banks. The New York banks themselves, 
as we have seen, held a larger reserve at the beginning of 
December than at the beginning of the previous month. 
Country banks in all sections of the country increased 
their cash holdings, though the increase was comparatively 



307 



National M on et ar y Commission 

slight in the North Atlantic States. At the beginning of 
the crisis the withdrawals of money from reserve agents 
were naturally most considerable on the part of those 
banks which were at a distance from their agents, and by 
banks generally in the West and South, where there had 
been numerous failures in 1893, and where, consequently, 
confidence in the banks was weak. The following table 
shows changes in the cash holdings of the country banks 
in different sections of the country: 

[Expressed in millions.] 



New England States. . 

Eastern States 

Southern States 

Middle Western States 

Western States 

Pacific States 



Turning now to the reserve cities, we shall find a similar 
repetition of the course taken by this group of banks in 
previous crises: 

[Expressed in millions.] 



Aug. 22. 


Dec. 3. 


$20. I 


$22. 


SS-9 


63. 


34-0 


44. 


54. 6 


66. 


21S 


31- 


13- I 


18. 



Loans 

Net deposits 

Cash reserve 

Reserve percentage 

Net deposits with reserve agents 



Aug. 22. 


Dec. 3. 


$1. 246. 


$1, 187.0 


$1,423.0 


$1,263.0 


$190.3 


$162.6 


13-4 


12.9 


$166. s 


$139-7 



»S9-0 
gi6o.o 
$27-7 

$26.8 



As in 1873 and in 1893, the reserve city banks reduced 
loans somewhat, in fact relatively rather more than the 
country banks, and their cash reserve was also reduced, 
but from the decline in reserves with agents it is clear 



308 



Crises Under National Banking System 

that they shifted as much of the burden as possible upon 
the banks of the central reserve cities. By means of a 
very considerable reduction in net deposit liability the 
ratio of cash reserve suffered no very appreciable de- 
cline. There were, of course, wide differences in the 
policy pursued by the banks of the forty reserve cities. 
In the East a relatively greater amount of cash was paid 
out than in the West and South. In general it may be 
said that reserve cities which were at the greatest dis- 
tance from the eastern money centers exhibited the great- 
est unwillingness to make use of their cash holdings. As 
in the case of the country banks, the confidence of the 
people in the banks is somewhat less than in the East, 
and there were not so many absolutely real needs among 
depositors for money for pay-roll and similar purposes 
as in the manufacturing sections of the country. 

On account of the importance of the central reserve 
cities the changes in their condition are presented sepa- 
rately : 

[Expressed in millions.] 

Decrease. 



Loans 

Net deposits 

Cash reserve 

Reserve percentage. 

Loans 

Net deposits 

Cash reserve 

Reserve percentage. 



Aug. 22. 


Dec. 3- 


$117.9 


$115.0 


fii6.8 


$107. I 


$26.8 


$21.0 


23.0 


19. 6 


$231.3 


$220.3 


$262. 9 


$226.3 


$66. I 


$S4.o 


25. 2 


23 -9 



52.9 
59-7 



$11.0 
$36.6 



Neither Chicago nor St. Louis shows very striking 
differences from the reserve cities taken as a whole. It 



309 



National Monetary Commission 

would indeed be possible to pick from among the reserve 
cities some in which the banks experienced as great or 
even greater loss in reserve and in which, moreover, there 
was no contraction of loans. It is far more true to the 
facts of actual banking practice to include these cities 
among those of reserve-city rank, because, after all, the 
full force of any financial strain rests primarily upon the 
banks of New York and in a way quite unlike that upon 
the banks of any other city. The following table shows 
the changes in the condition of the New York banks be- 
tween August 22 and December 3, 1907: 

[Expressed in millions.] 



Aug. 22. 



Dec. 3. 



Increase 
(+). de- 
crease ( — ). 



Loans 

Net deposits 

Cash reserve 

Reserve percentage . 



J57I2.7 

$825.7 

$218. 8 

26. 5 



$776-9 

$824.4 

$177- I 

20. 5 



+$64.2 
- $1.3 
-$41.7 



The causes of the increase in loans of the New York 
banks have already been set forth. As a consequence 
of that increase, net deposit liability remained almost 
unchanged, notwithstanding the loss of $41,700,000 in 
reserve. Both the percentage of the total reserve which 
was used and the decline in ratio of reserves to deposits 
make a good showing for the New York banks in compari- 
son with those elsewhere, though allowance must be made 
for the fact that the loss in cash came before the New 
York banks restricted payments and before any consid- 
erable withdrawals were made from banks elsewhere. 
The showing is not particularly flattering when one con- 



310 



Crises Under National Banking System 

siders that New York is the central money market of the 
country. Less than one-fifth of their reserves was used 
by the banks. According to the statement for the begin- 
ning of December the banks were then a httle above 
the lowest point in their reserves, but as the Morse- 
Heinze banks were included in that statement it may be 
safely assumed that at no time did the active solvent 
banks use more than about that portion of their cash 
holdings. 

On account of the concentration of bankers' deposits 
in a few banks it is desirable to carry the analysis one 
step further. In New York the six large banks having 
the bulk of such deposits held a cash reserve of 
$139,700,000 on August 22; on October 26, according to 
the bank statement, they held $132,200,000; on Decem- 
ber 3 these banks held $112,500,000, a loss of $27,200,000 
since August, almost exactly the 20 per cent by which 
the reserves of all the banks were reduced. The utility 
in an emergency of that part of the reserves of the national 
banks which can be placed with reserve agents is indeed 
slight. Emphasis is placed upon the case of the six 
banks because of their relative importance, but in this 
respect they were not appreciably better or worse than 
other banks in New York or elsewhere. It is quite possi- 
ble that some individual banks may have made great 
efforts to meet the requirements of their banking de- 
positors, but upon the whole it seems probable that they 
gave far more attention to the needs of individual local 
depositors. No recognition of the peculiar responsi- 
bility incurred in accepting bankers' deposits, such as 



3" 



National M on et ar y Commission 

was expressed in the report of the special clearing-house 
committee in 1873, seems to have been felt by the banks 
which acted as reserve agents in 1907. 

In order to show the ineffectiveness of the deposited 
portion of the reserves of the banks, the following table 
has been prepared. The banks in each of the central 
reserve cities holding any considerable amount of bankers ' 
balances are arranged in the order of their importance. 
The various items of indebtedness between banks are 
given and also the amount of cash reserves for August 22 
and December 3, 1907. The table includes in the case 
of New York seventeen of the thirty-eight banks and all 
but 7 per cent of net bankers' deposits. For Chicago, nine 
of the fourteen banks, and 98 per cent of deposits; and 
for St. Louis, five of the eight banks and 98 per cent of 
net bankers' deposits. 

The table does not show the full extent to which reserve 
agents responded to the demands of their correspondents, 
since bankers' deposits were increased through inter-bank 
borrowing. Among the national banks alone there was 
an increase of $41,800,000 in rediscounts and bills pay- 
able. Making every allowance for this factor, however, 
the comparatively small reduction in the cash holdings 
of the banks of central reserve cities proves conclusively 
that balances with city banks were of slight utility. Our 
banking system would be strengthened by a very mod- 
erate increase in cash reserve, even if much of that por- 
tion of the reserve now deposited was no longer required, 
and owing to the concentration of said deposits the 
profits of a comparatively small number of banks would 
be seriously diminished. 

312 



Crises Under National Banking System 



Bankers' deposits and cash reserves of the important banks in the central 
reserve cities on August 22 and December j, igoy. 

{Expressed in millions.] 



NEW YORK. 

National City 

National Bank of Commerce 

First , 

National Park Bank 

Hanover 

Chase 

Seaboard 

Importers and Traders 

Fourth 

Mechanics 

Merchants 

Bank of New York, N. B. A. 

American Exchange 

Irving National Exchange., 

Citizens Central 

Liberty 

Chemical 



CHICAGO. 

First 

Continental 

Corn Exchange 

Commercial 

Bankers 

Bank of the Republic. 

Fort Dearborn 

Drovers Deposit 

National Live Stock . . 



ST. LOUIS. 

National Bank of Commerce. 

Mechanics-American 

Third 

Merchants Laclede 

Central 



August 22, 1907. 



Due 
from 
banks 



»4.7 
7.6 

1. 2 

3- 7 

2. 9 
2. 7 

1. 7 
1-3 

2. I 
i-S 
2. I 
i-S 
3.8 

.9 
1.6 

.7 
2. I 



15- 2 
6.6 
6.8 
4. 9 
3-8 
30 
2. I 
. 7 
I-S 

8.5 
6.8 
7.8 
2. o 
I 4 



Due 

to 

banks 



Net 
liabili- 
ties to 
banks. 



Cash 



4S.O 


14. I 


13.3 


14. 


9.9 


9.8 


7.9 


9.4 


6.4 


6.3 


S- I 


6.4 


53.6 


39.4 


24. 2 


21.8 


12.3 


9. 7 


54 


3.8 


4.4 


32.3 


19. 8 


17.9 


5.6 


4 2 



23.8 

13-0 

10. I 

3.6 

2.8 



.8 


$40 


■3 


27 


.8 


19 


■5 


21 


.3 


16 


■3 


14. 


■ 4 


4. 


. 


5- 


■ 9 


3- 


■ 4 


4. 


. 7 


3- 


4 


3- 


6 


4. 


S 


3- 


7 


3. 


4 


2. 


3 


6. 



20. o 

14. 1 

10. 6 
7. 4 
3.0 
3. 2 
2. o 
I. 2 



10.3 
4.8 
55 
2. o 



December 3, 1907, 



Due 
from 
banks 


1 
Due 
to 
banks. 


$4-3 


$64.0 


1-5 


64 


9 


.8 


40 


7 


5.8 


41 


3 


1.9 


47 


I 


3-9 


50 


3 


I. 


14 


8 


1.6 


12 


I 


2.3 


14 


8 


1.6 


II 


6 


2.4 


9 


9 


.9 


8 


7 


2.9 


10 


9 


I. 4 


5 


4 


2.4 


4 


2 


.8 


S 


8 


2.8 


9 


6 


12. 9 


45. 9 


9.3 


35- 4 


6.2 


20. 6 


5.8 


18. I 


4. I 


11.3 


4 5 


9. 


1-7 


2-5 


•5 


2.9 


I. 2 


2.9 


8.2 


26. 


4. 2 


155 


7- 7 


14.9 


1.6 


6. I 


I- 5 


4- 


2 



Net 
liabili- 
ties to 
banks. 



Cash 
re- 
serve. 



?59.7 


63 4 


39.9 


35-5 


45- 2 


46. 4 


13.8 


10. s 


12.5 


10. 


75 


7.8 


8.0 


4.0 


1.8 


5-0 


6.8 


33.0 


26. I 


14. 4 


12.3 


7. 2 


4.5 


.8 


2.4 


I. 7 


17.8 


11.3 


7. 2 


4.5 


2. 7 



533-7 
24. S 
15.2 
14. 2 
12. 7 
12.0 
3. 7 
4-7 
5.6 
3.6 
3.0 
3.4 
4.9 

2-5 

3.8 
IS 
9.8 

17. o 

10, 3 
9.0 
6.3 
2.8 
3.8 
I. 2 

• 7 

1. 2 
7.8 

3-5 
3.6 

2. I 



313 



National Monetary Commission 

EXPANSION OF THE CIRCUIvATiNG MEDIUM. 

The various substitutes for money used during the panic 
were made the subject of an elaborate investigation by 
Dr. A. P. Andrew, now Director of the Mint, and copious 
extracts from a paper by him are reproduced in the appen- 
dix to this report.'^ A total of $238,000,000 of clearing- 
house loan certificates of large denominations solely for 
use between the banks was issued. An estimated amount 
of more than $250,000,000 was provided for everyday use 
in the form of small clearing-house loan certificates, clear- 
ing-house checks, cashiers' checks, pay checks, and other 
devices. By no means all of any of these various sub- 
stitutes for money were in circulation at any one time. 
It has been estimated, for example, that of the $101,000,- 
000 of loan certificates issued by the New York Clearing 
House not more than $74,000,000 was actually in use.^ 
Although the amount of these substitutes was greater 
absolutely, and probably relatively, than in previous 
crises, it does not follow that the banks restricted cash 
payments more completely. As has already been ob- 
served, it seems likely that by means of these substitutes 
the local requirements of individual depositors were met 
more completely than in the past. It may also be men- 
tioned that the issues of loan certificates for payments 
between the banks did not represent any addition to the 
circulating medium. They simply obviated the customary 
shifting of money between the banks in the settlement of 
daily balances, with the result that the money held by the 

o Appendix, Note K, pp. 434-459. 

bSee the Commercial and Financial Chronicle, May 30, 1908, p. 13 15. 

314 



Crises Under National Banking System 

banks remained just where it was at the time they were 
authorized. 

An enormous increase in the money supply of the 
country was made between the end of August and the 
beginning of December. The following table shows 
the estimated amount of money in circulation, including 
that in the banks at the close of each month from 
August to December, 1907: 





(Expressed in millions.] 








Amount. 


Increase. 




$2,789 
2.80s 
2,876 
3. 008 
3.078 






$16 








132 









The increase during September and October was almost 
wholly owing to deposits of additional government funds 
in the banks. During November and December it was 
due chiefly to gold imports and issues of bank notes. 
The increase of $219,000,000 during the first four months 
of the period, together with the loss of $41,000,000 by the 
banks, a total of $260,000,000, represents the amount of 
money which had gone into use or into hoards as a result 
of the crisis. During December money began to flow 
back into the banks to an extent it may be assumed at 
least equal to the increase in the money supply of the 
country during that month. The composition of the 
$219,000,000 by which the money in circulation was 
increased between the end of August and the beginning 
of December was as follows : the gold supply was increased 



6158 — 10 21 



315 



National M on et ar y Commission 

$90,000,000, of which $70,000,000 was due to imports; 
there was a sHght addition of $5,000,000 to the amount of 
silver money, and an increase of $52,000,000 in bank notes; 
to this total of $146,000,000 must be added further 
government deposits with the banks to the amount of 
$73,000,000. This large increase in the available supply 
of money indicates the extent to which the banks were in 
a better position to cope with the crisis of 1907 than were 
the banks in 1873. 

THE TREASURY AND THE PANIC. 

One much discussed measure taken during the crisis 
would have been seen to be quite unnecessary had experi- 
ences in former crises been familiar. On November 19, 
although the Treasury was amply supplied with funds, 
subscriptions were invited for the issue of $50,000,000 of 
2 per cent Panama bonds and for $100,000,000 of 3 per 
cent certificates. The object in view was to provide the 
banks with securities as a basis for additional issues of 
bank notes. It was arranged that the banks should retain 
90 per cent of the purchase price of the bonds as a deposit, 
and 75 per cent in the case of the certificates. A con- 
siderable percentage of the new securities would thus have 
been required as a security for the deposits created in 
purchasing them, but most of this requirement was met 
by the use of state and municipal bonds which were not 
available for circulation. The offer of $150,000,000 of 
these new securities excited much opposition, and in fact 
bids were accepted to the amount of $24,631,000 of 
bonds, and $15,436,000 in the case of the certificates. 
The positive effect of these new issues in additional cir- 

316 



Crises Under National Banking System 

culation was not experienced until December, during which 
there was an increase of $34,000,000, a large part of which 
would not have been made if these securities had not been 
issued. In his able defense of his resort to this arrange- 
ment even the Secretary of the Treasury seems to have 
felt that the issue of notes at that time served no useful 
purpose. Money was then flowing back to the banks 
because of trade depression, and continued to do so for 
many months thereafter. He rested his case upon the 
moral effect of the relief offered, urging that — 

The most potent weapon at such times in bringing a crisis to an end is 
often as much one of moral effect as of the definite action taken. It has 
been the history of many great crises in Europe, as well as in this country, 
that the knowledge that adequate resources existed to avoid disaster was 
often sufficient to obviate the necessity for employing such resources to 
their utmost limit. An illustration in point is the action of the chancellor 
of the exchequer in Great Britain in the panic of 1866, when the announce- 
ment that he had authorized the Bank of England to disregard the bank 
act and to issue its notes to any necessary limit promptly arrested pressure 
upon the banks. So prompt was the response of public feeling to this 
action in suspending the demand for discounts and the withdrawal of 
deposits that the bank did not find it necessary to avail itself of the authority 
to issue additional notes. The fear that accommodation could not be 
obtained by solvent business men was completely allayed and the panic 
almost immediately subsided .0 

But the situation in the United States was quite unlike 
that in England. The Bank of England had used its 
inadequate reserves; the national banks had not. It was 
prepared to issue the notes secured by this special device, 
while the national banks, including those of New York, 
seem merely to have taken advantage of their issue to 
build up their reserves a little more rapidly and did not 
resume the ordinary course of payments. If the Secre- 



o Response of the Secretary of the Treasury to Senate Resolution No. 
33 of December 12, 1907. Senate Doc, 60th Congress, ist session, p. 17. 

317 



National M on et ar y Commission 

tary of the Treasury had offered to issue these securities 
during the week ending October 26 on condition that the 
New York banks enter into arrangements with each other 
which would have made possible further efforts to main- 
tain payments, much could be said for the wisdom and 
courage of the policy. But after suspension the condi- 
tion of affairs was entirely changed. A few millions more 
or less in the reserves of the banks or in the hands of the 
people could make little difference one way or another. 
The dislocation of the exchanges could only be overcome 
by resumption of payments by the banks; but they 
showed no willingness to resume until the people, mani- 
festing more confidence in the banks than the banks 
manifested in the people, began to restore the money 
which had been withdrawn. 

CONCIvUSION. 

We have already seen that restrictions upon cash pay- 
ments were not removed until the beginning of January. 
Long before that time the banks in many parts of the 
country had intimated their readiness to resume if the 
New York banks would lead the way. Money was ac- 
cumulating in banks both in New York and elsewhere, 
but the New York banks took no definite action, until 
dt length in the last week of the year reported movements 
of money between the banks and the rest of the country 
showed a considerable balance in favor of the city. The 
returns of the banks to the Comptroller of the Currency 
on February 15 showed, as usual after a crisis, an enormous 
increase in the cash reserves of the banks, an increase in 
this instance of no less than $124,000,000. A consid- 

318 



Crises Under National Banking System 

erable part of this amount must have been received dur- 
ing December, and its beginning should have been marked 
by the immediate resumption of cash payments. 

It is impossible to escape the depressing conclusion 
that the banking situation in 1907 was handled less skill- 
fully and boldly than in 1893, and far less so than in 1873. 
No new elements of weakness were disclosed, but no real 
effort was made to overcome difficulties which had been 
met with partial success at least on former occasions. 
A situation which was certainly less serious than in 1873 
or 1893 and probably less serious than in 1884 was allowed 
to drift into the most complete interruption of its bank- 
ing facilities that the country has experienced since the 
civil war. The fundamental cause of the trouble would 
seem to have been a lack of faith in the possibility of 
escaping suspension in an emergency under the existing 
banking system. This feeling has been intensified as a 
result of the crisis of 1907. It is based upon vivid per- 
ceptions of the effects rather than an understanding of the 
causes of the breakdown of the country's credit machin- 
ery. These effects are indeed most serious, but if this 
investigation may be made the basis for any conclusion, 
it is that though the causes of crises are extremely various, 
the method of handling them on the banking side is 
simple. 

Somewhere in the banking system of a country there 
should be a reserve of lending power, and it should be 
found in its central money market. Ability in New York 
to increase loans and to meet the demands of depositors 
for money would have allayed every panic since the 



319 



National M o n et ar y Commission 

establishment of the national banking system. Pro- 
vision for such reserve power may doubtless be made in a 
number of different ways. This investigation will have 
served its purpose if in showing the causes and conse- 
quences of its absence in the past it brings home to the 
reader the need not only of this reserve power, but also of 
the readiness to use it in future emergencies. 



320 



Note A.'' 

Extracts from the Annual Report of the Secretary 
OF THE Treasury (William A. Richardson) Relating 
TO THE Crisis of 1873. '^ 

The prevailing practice, not only of national banks but 
of state banks and private bankers, of paying interest on 
deposits attracts currency from all parts of the country 
to the large cities, and especially to New York, the great 
financial center. At seasons of the year when there is 
comparatively little use for currency elsewhere, immense 
balances accumulate in New York where, not being re- 
quired by the demands of legitimate and ordinary busi- 
ness, they are loaned on call at a higher rate of interest 
than that paid to depositors, and are used in speculation. 

Every year, at the season when the demand sets in from 
the West and South for currency to be used in payment 
for and transportation of their agricultural products, there 
occurs a stringency in the money market arising from the 
calling in of such loans to meet this demand. 

Until this year, though annually creating some embar- 
rassment, this demand has been met without serious 
difficulty. 

During the past summer, anticipating the usual autumn 
stringency, the Treasury Department sold gold while the 
market price was high, currency abundant, and bonds for 
sale in the market were scarce, and while there was a 
surplus of gold in the Treasury ; and thereby accumulated 
about $14,000,000 of currency with the view of using 
the same, or such part thereof as might be necessary, 

o Finance Report, 1873, pp. xi-xviii. 
321 



National Monetary Commission 

in the purchase of bonds for the sinking fund at times 
during the autumn and winter when they could be bought 
at a price not above par in gold, or in meeting demands 
upon the Treasury, as circumstances should require. 

This year there was a great demand for currency to 
pay for the heavy crops of a bountiful harvest, for which 
the European countries offered a ready market. The sus- 
pension of certain large banking houses, the first of which 
occurred on the i8th day of September, alarmed the people 
as to the safety of banks and banking institutions in gen- 
eral. Suddenly there began a rapid calling in of demand 
loans and a very general run on the banks for the with- 
drawal of deposits. Entire confidence was manifested in 
United States notes and even in national-bank notes, and 
they were drawn wherever they could be obtained, and 
were largely hoarded with as much avidity as coin was 
ever hoarded in times of financial distress when that was 
the circulating medium of the country. The banks found 
themselves unable to meet the demands upon them, cur- 
rency in circulation became exceedingly scarce, and the 
business of the country became greatly embarrassed. 

In this condition of things great pressure was brought 
to bear upon the Treasury Department to afford relief by 
the issue of United States notes. The first application 
came from a number of gentlemen in New York, suggest- 
ing that no measure of relief would be adequate that 
did not place at the service of the banks of that city 
$20,000,000 in United States notes, and asking that 
the assistant treasurer at New York should be authorized 
to issue to those banks that amount of notes as a loan upon 



322 



Crises Under National Banking System 

a pledge of clearing-house certificates secured by ample 
collaterals, and for which certificates all the banks were 
to be jointly and severally responsible. This proposition 
was declined, it being clearly not within the duty or the 
authority of the Treasury Department, under any pro- 
visions of law, thus to employ the public money. 

Exchange on Europe having fallen to unusually low 
rates, and indeed having become almost unsalable in the 
market, to the embarrassment of our foreign and domestic 
trade, applications were made to the Secretary of the 
Treasury to use the money in the Treasury in the purchase 
of exchange. The Treasury Department having no occa- 
sion to do this for its own use and no necessity for trans- 
ferring funds to Europe, was compelled to decline this 
proposition, which if accepted would have put the depart- 
ment in the position of becoming a dealer in exchange, a 
position clearly inconsistent with its duties. 

Subsequently the New York Produce Exchange made 

a proposition to accomplish the same result in a different 

form, and also requested, as others had before, that the 

Secretary should pay at once the twenty-million loan of 

1858, to which the following reply was made: 

Treasury Department, 
Washington, September 30, 1873, 

Sir: Your letter of the 29th instant, covering two resolutions of the New 
York Produce Exchange, has been received and the subject-matter fully 
considered. 

The resolutions are as follows: 

" Whereas the critical condition of the commercial interests of the 
country requires immediate relief by the removal of the block in negoti- 
ating foreign exchange; therefore be it 

" Resolved, That we respectfully suggest to the Secretary of the Treasury 
the following plans for relief in this extraordinary emergency : 

"First. That currency be immediately issued to banks and bankers, 
upon satisfactory evidence that gold has been placed upon special deposit 

323 



National M o n e t ar y Commission 

in the Bank of England, by their correspondents in London, to the credit 
of the United States, to be used solely in purchasing commercial bills of 
exchange. 

"Second. That the President of the United States and the Secretary of 
the Treasury are respectfully requested to order the immediate prepay- 
ment of the outstanding loan of the United States due January i, 1874." 

While the Government is desirous of doing all in its power to relieve the 
present unsettled condition in business affairs— as has already been 
announced by the President — it is constrained, in all its acts, to keep within 
the letter and spirit of the laws, which the officers of the Government are 
sworn to support, and they can not go beyond the authority which Con- 
gress has conferred upon them. Your first resolution presents difficulties 
which can not be overcome. It is not supposed that you desire to exchange 
coin in England for United States notes in New York at par. If your 
proposition is for the Government to purchase gold in England, to be paid 
for in United States notes at the current market rate in New York, it would 
involve the Government in the business of importing and speculating in 
gold, since the Treasury has no use for coin beyond its ordinary receipts, 
and would be obliged to sell the coin so purchased at a price greater or less 
than was paid for it. If your object is to induce the Treasury Department to 
loan United States notes to banks in New York upon the pledge and deposit 
in London of gold, it is asking the Secretary of the Treasury to loan the 
money of the United States upon collateral security for which there is no 
authority in law. If the Secretary of the Treasury can loan notes upon a 
pledge of coin he can loan them upon a pledge of other property in his 
discretion, as he has recently been requested to do, which would be an 
extraordinary power as well as a most dangerous business to engage in, 
and which my judgment would deter me from undertaking, as the Secre- 
tary of the Treasury, even if by any stretch of construction I might not 
find it absolutely prohibited by law. The objections already mentioned to 
your first resolution are so insuperable and conclusive that it is unnecessary 
for me to refer to the many practical difficulties which would arise if an 
attempt should be made to comply with your request. Your second reso- 
lution calls for the payment at once of the loan of 1858, or the bonds com 
monly called "fives of 1874." Upon a thorough investigation I am of opinion 
that Congress has not conferred upon the Secretary of the Treasury power to 
comply with your request in that particular, and in this opinion the law 
officers of the Government concur. Under these circumstances you will 
perceive that, while I have great respect for the gentlemen comprising the 
New York Produce Exchange, I am compelled, by my views of the law and 
of my duty, to respectfully decline to adopt the measure which your 
resolutions propose. 

I have the honor to be, very respectfully, 

Wm. a. Richardson, 

Secretary of the Treasury. 

324 



Crises Under National Banking System 

The Chamber of Commerce of Charleston, S. C, peti- 
tioned for the transfer of currency to that city, and the 
purchase with it at that point of exchange on New York, 
to aid those engaged in forwarding the cotton crop to the 
market. The following letter was sent in answer to this 
petition : 

Treasury Department, October j, i8js. 
Samuel Y. Tupper, Esq., 

President Chamber of Commerce, Charleston, S. C: 

I have the honor to acknowledge the receipt of the memorial of the 
Charleston (S. C.) Chamber of Commerce, addressed to the President of the 
United States, and referred to this department, which, after rectifying the 
present stringency in the money market and the difficulty of obtaining 
currency, requests "that the sum of $500,000 be placed and maintained on 
deposit with the assistant treasurer at Charleston, to be used by him in 
the purchase of New York exchange from the banks." 

To comply with the request, it would be necessary for the Treasury 
Department to send currency by express to Charleston from time to time, 
and to buy with it exchange on New York in competition with private 
bankers. 

Should this request be granted, a hundred other places in the country 
might, with equal propriety, ask for the same relief, and if all such requests 
were impartially granted the department would find itself engaged in an 
extensive exchange business, fixing and regulating the rate of exchange 
between different places in the country, and the public money, raised by 
taxation only for the purpose of carrying on the Government, would be 
employed to a very large amount in a business which Congress has not given 
the Secretary of the Treasury any authority to engage in. 

With a due regard to the proper management of the Treasury Depart- 
ment, within the provisions of the law, I have felt it to be my duty to 
decline all similar propositions from other places, and your request must 
therefore receive the same response. 

I have the honor to be, very respectfully, yours, 

Wm. a. Richardson, 

Secretary of the Treasury. 

The executive department of the Government was anx- 
ious to do everything in its power, under the law, and with 
due regard to the protection of the Treasury and the main- 
tenance of public credit, to allay the panic and to prevent 
disaster to the legitimate commercial and industrial inter- 

325 



National Monetary Commission 

ests of the country; but it was found impossible to afford 
the relief in any of the many forms in which the relief was 
asked. It was decided, therefore, to adopt the only prac- 
ticable course which seemed to be open to it — the purchase 
of bonds for the sinking fund to such an extent as the con- 
dition of the Treasury would allow, and thus release a 
considerable amount of currency from its vaults. Pur- 
chases of bonds were commenced on the morning of the 
2oth of September and were continued until the 24th, 
when it became evident that the amount offering for pur- 
chase was increasing to an extent beyond the power of 
the Treasury to accept, and the purchasing was closed after 
bonds to the amount of about $13,000,000 had been 
bought, and without the use of any part of the $44,000,000 
of United States notes generally known as the reserve. 

It should be stated that in the excitement there were 
many persons in the city of New York who insisted with 
great earnestness that it was the duty of the Executive to 
disregard any and all laws which stood in the way of afford- 
ing the relief suggested by them — a proposition which 
indicates the state of feeling and the excitement under 
which applications were made to the Secretary of the 
Treasury to use the public money and which, it is scarcely 
necessary to add, could not be entertained by the officers 
of the Government to whom it was addressed. 

These facts are recited in order to lay before Congress 
and place on record in a concise form exactly what the 
Treasury Department was asked to do, and what it did, 
in the late financial crisis. 



326 



Crises Under National Banking System 

The currency paid out of the Treasury for bonds did 
much to strengthen many savings banks and to prevent 
a panic among their numerous depositors, who began to 
be alarmed, and had there developed an extended run 
upon those useful institutions it would inevitably have 
caused widespread disaster and distress. It also fortified 
other banks and checked the general alarm to some extent. 
But the loss of confidence in the value of a great amount 
of corporate property which immediately followed the 
failure of banking houses connected with largely indebted 
corporations, the distrust of the solvency of many other 
institutions, the doubt as to the credit of firms and indi- 
viduals whose business was supposed to be greatly ex- 
tended, and the legitimate effect thereof in disturbing 
the business of the country could not be avoided by any 
amount of currency which might be added to the circu- 
lation already existing. 

Confidence was to be entirely restored only by the 
slow and cautious process of gaining a better knowledge 
of true values and making investments accordingly and 
by conducting business on a firmer basis, with less infla- 
tion and more regard to real soundness and intrinsic 
values. 

There can be no doubt that the practice of banks of 
allowing interest on deposits payable on demand is per- 
nicious and fraught with danger and embarrassment to 
borrower and lender, as well as to the general business 
interests. 

Deposits payable on demand should be limited to that 
surplus which individuals require over and above their 



327 



National Monetary Commission 

investments, and no part of that from which they expect 
an income. Such deposits are comparatively stable in 
average amount, and constitute a healthy basis for bank- 
ing purposes within proper limits, which prudent bankers 
know how to determine. 

But if deposit accounts are employed as temporary 
investments, the interest attracts a large amount of 
money to those cities where such interest is paid, and 
where speculation is most active, at seasons when as 
Aiuch profit thereon can not be secured elsewhere. With 
the first return of activity in legitimate business these 
temporary investments are called in and jeopardize in 
their sudden withdrawal the whole business of the banks, 
both affecting the legitimate depositors on the one hand 
by excitement and distrust, and on the other creating a 
condition of things in which the borrowers on call are 
also unable to respond. The banks have borrowed their 
money of depositors on call. They have loaned it on 
call to speculators, who by its use have contributed to 
inflate the prices of the stocks or merchandise which have 
been the subject of their speculations. The speculator 
wants it till he can dispose of them without a loss. This 
he is unable to do in a stringent money market. The 
banks, their depositors, and the borrowers all want it at 
the same time, and of course a stringency is developed 
which spreads distress throughout the country. 

The system creates immense amount of debts payable 
on demand, all of which thus suddenly and unexpectedly 
mature at the first shock of financial or commercial 
embarrassment in the country and at the very time when 



328 



Crises Under National Banking System 

most needed by debtors and when they are least able 
to respond. 

There is no safety for corporations or individuals whose 
capital employed is wholly or mostly borrowed on call. 
Many savings banks were protected from ruin in the 
recent financial excitement by availing themselves of 
provisions in their rules requiring sixty days or other 
periods of notice before paying depositors, thus making all 
their deposits payable on time. Every cautious and 
well-managed savings institution has such a rule among 
its by-laws. 

Without attributing the stringency in the money 
market which is experienced every autumn and occa- 
sionally at other seasons of the year solely to this prac- 
tice of paying interest upon deposits in the large cities, 
it is evident that when money is less needed in legitimate 
business the practice encourages overtrading and specu- 
lation, always detrimental to the best interests of the 
country, and the bad effects of which upon those interests 
become more apparent and the disaster more widespread 
when the necessary contraction begins to be felt. 

I recommend that the national banks be prevented 
from paying interest on deposits, or that they be restricted 
and limited therein, either by direct prohibition, by dis- 
criminating taxation, or otherwise. 

While legislation by Congress can not prevent state 
banks and private bankers from continuing the practice, 
it can prevent national banks from becoming involved 
in and instrumental in producing the embarrassments 
and difficulties to which it necessarily leads. 



329 



National M on et ar y Commission 

The national banks, organized by law of Congress and 
having relations with the Government in the issue of 
circulating notes, ought to be the most cautious and safe 
banking institutions of the country, and should be kept 
aloof from all hazardous business which it is not possible 
to prevent sanguine, venturesome, and speculative in- 
dividuals from engaging in at the risk of their capital and 
their credit. 

With a fixed amount of circulation of bank notes and 
of United States legal-tender notes not redeemable in 
coin and with gold above par in currency, there must be 
each year times of redundancy and times of scarcity of 
currency, depending wholly on the demand, no method 
existing for increasing the supply. 

With a circulating medium redeemable in coin, a re- 
dundancy is corrected by the export, and a scarcity by 
the import of specie from other countries. 

There is a prevailing sentiment that more elasticity 
should be given to the volume of the currency, so that 
the amount in circulation might increase and diminish 
according to the necessities of the business of the country. 
But the difference of opinion on this subject is so great 
and the real difficulties attending its solution are so 
numerous that, without discussing any of the multitude 
of plans which have been presented to the public through 
the press and otherwise, I earnestly commend to the 
wisdom of Congress a careful and thorough consideration 
of this important subject, rendered more obviously im- 
portant by the present embarrassed condition of large 
business interests which have suffered by the recent 



330 



Crises Under National Banking System 

financial crisis; and that, in such inquiry, avoiding further 
inflation of the issue of irredeemable legal-tender notes, 
the most desirable of all financial results to be attained, 
namely, a permanent return to the sound basis of specie 
payments and a gold standard to which all our paper 
issues shall be made of equal value, shall be the aim. 

To allow national banks to use part of their reserves 
at seasons of the greatest pressure, under proper restric- 
tions and regulations, would afford some flexibility. 

Rigid statute laws applied to all banks at all seasons 
and in all places alike often prove an embarrassment and 
injury when they conflict with economic principles and 
the laws of trade and business, which are stronger than 
legislative enactments and can not be overthrown thereby. 
Associated banks at the several redemption cities named 
in the banking law, which are the great controlling centers 
of business, might do much to give steadiness and safety 
if they were authorized, through properly constituted 
boards or committees of their own officers, to exercise a 
large discretion in the use of their reserves in the rate of 
interest to be charged at different seasons and under 
different circumstances and in other matters within 
limits prescribed by law. 



6158—10 22 331 



Note B. 
Extracts i^rom the Annual Report op the Comp- 

TROIvLER OF THE CURRENCY (JOHN JaY KNOX) RELAT- 
ING TO THE Crisis oe 1873.'^ 

The crisis was caused in a great degree by the desire 
of the country banks to withdraw their balances from the 
city banks; first, because in the month of September the 
amount on deposit with the city banks was needed for 
the legitimate purposes of trade; and secondly, because 
the country banks, foreseeing and fearing the return of 
the experience of previous years, thought it safer to with- 
draw their balances at once. When the reserves of the 
New York City banks became alarmingly reduced by the 
drafts of their country correspondents, the only resource 
left to the city banks was to convert their call loans, 
amounting to some $60,000,000; but these, if paid at all, 
were paid in checks upon the associated banks, and the 
latter found, the next morning, at the clearing house, that, 
although a portion of their liabilities had been reduced 
by the payment of call loans, they were in the aggregate 
no richer in currency than on the previous day. * * * 

[^The reserves of the 1,900 national banks located else- 
where than in the city of New York are held to a great 
extent in that city. For most of the time during the 
past year an amount equal to more than one-fifth of the 
capital of all these national banks has been held on 
deposit by the national banks of the city of New York to 

o Finance Report, 1873, pp. 86-96. 

b The three succeeding paragraghs which are enclosed in brackets are a 
part of an excerpt from the report of 1872. 

332 



Crises Under National Banking System 

the credit of their correspondents. In many cases these 
credits amount to twice the capital of the bank with which 
they are deposited ; in other cases the amount of deposits 
is three, four, and even five times the capital, which 
amount has been attracted thither largely by the payment 
of interest on deposits. The failure of one of these New 
York City banks in a time of monetary stringency would 
embarrass, if not ruin, many banks in the redemption 
cities, and, in turn, the country correspondents of these 
banks would suffer from the imprudence of the New 
York bank, which would be responsible for wide-spread 
disaster. * * * 

In times of excessive stringency loans are not made by 
such associations to business men upon commercial paper, 
but to dealers in speculative securities, upon short time, 
at high rates of interest ; and an increase of call loans be- 
yond the proper limit is more likely to afford facilities for 
unwarrantable stock speculations than relief to legitimate 
business transactions. * * * 

The variations in the liabilities requiring reserve in the 
banks of the city of New York are very great. The banks 
outside of New York during the dull season send their 
surplus means to that city for deposit upon interest, to 
await the revival of business. The banks in the city of 
New York at such periods of the year have no legitimate 
outlet for these funds, and are, therefore, threatened with 
loss. The stock board takes advantage of this condition 
of affairs, speculation is stimulated by the cheapness of 
money, and a market is found for the idle funds upon 
doubtful collaterals, and the result is seen in the increased 



Hi 



National Monetary Commission 

transactions at the clearing house, which during the past 
year exceeded $32,000,000,000, or an average of more than 
$100,000,000 daily — not one-half of which was the result 
of legitimate business; the total amount of transactions 
being greater than that of the bankers' clearing house of 
the city of London. The evil arises largely from the pay- 
ment by the banks of interest on deposits, an old and es- 
tablished custom which can not easily be changed by di- 
rect legislation. A considerable portion of these deposits 
would remain at home if they could be used at a low rate 
of interest, and made available at any time upon the return 
of the season of active business. No sure investment of 
this kind is, however, open to the country banks, and the 
universal custom is to send forward the useless dollars 
from vaults comparatively insecure to their correspond- 
ents in the city, where they are supposed to be safer and 
at the same time earning dividends for shareholders.] 

The rule requiring a reserve was adopted by the vol- 
untary action of the Clearing House Association of the 
city of New York previous to the passage of the national 
currency act. At a meeting of bank officers, represent- 
ing 42 of the 46 banks of the city of New York, held at 
the rooms of the Clearing House Association in March, 
1858, it was agreed "to keep on hand at all times an 
amount of coin equivalent to not less than 20 per cent 
of our net deposits of every kind, which shall be made to 
include certified checks and other liabilities, except cir- 
culating notes, deducting the daily exchanges received from 
the clearing house." This resolution was adopted five 



334 



Crises Under National Banking System 

years previous to the passage of the national currency 
act, and its phraseology is not unlike the provisions of 
that act in reference to reserves to be held by the national 
banks of New York City. The resolution did not pro- 
vide for a reserve on circulation for the reason that the 
circulation of the city banks was at that time redeemable 
at par in coin, so that no action was necessary in respect 
to the reserve to be held upon circulating notes. From 
that time to the passage of the national currency act 
the resolution was generally observed, and since the 
passage of the act neither the New York Clearing House 
Association nor the clearing house association of any 
city has requested the repeal of such restrictions. On the 
contrary, the New York association has repeatedly refused 
to modify the rule by agreeing that national-bank notes, 
which by the law can be used in payment of debts to 
each other, may be so employed. 

The national currency act requires that the national 
banks "shall at all times have on hand" the reserve 
required in lawful money, and the advocates of a repeal 
of the reserve laws insist that, under this provision, the 
national banks are absolutely prohibited from using 
these reserves at any time. The provision requiring that 
a reserve shall be kept on hand at all times was intended 
to protect the depositor and to keep the bank in funds for 
the purpose of responding at all times to the demands 
of its creditors. This is evident from the fact that the 
bank is required, when its reserves become deficient, to 
cease discounting and making dividends until the amount 
of the reserve shall be restored. The word "reserve" is 



335 



National Monetary Commission 

used, as has been suggested, in the same sense as it is 
used in an army, and "the fact that a miUtary commander 
can not be definitely instructed when he may employ 
his reserve force is not regarded as a reason why that 
important portion of the army organization should be 
abandoned or be reduced in number of effici^icy." To 
claim that a bank can not redeem its own notes upon 
presentation, and can not pay the checks of its depositors 
on demand if the payment of such debts shall intrench 
upon its reserves, is equivalent to declaring that the 
national currency act was intended to provide for the 
destruction of the very institutions it had created. From 
the first organization of the system to the present time 
the uniform decisions have been that the object of the 
reserve is to enable the bank at all times to pay its debts. 
In times of panic the depositors of a bank, and not its 
officers and directors, are its masters; and it is absurd 
to maintain that a bank, liable at such times to be called 
upon to pay its debts would, if there were no reserve laws, 
loan upon commercial paper, at the risk of almost certain 
failure and disgrace, the money which belongs to its 
creditors. 

While the Comptroller concedes that experience may 
hereafter justify a modification of the provisions of the 
act in this respect, he is clearly of the opinion, in view of 
the lessons to be derived from the late suspension in 
New York, that he would not be warranted in recom- 
mending any change at present. 



2>3(> 



Crises Under National Banking System 

THE PANIC OF 1873. 

The monetary crisis of 1873 may be said to have had 
its beginning in New York City on September 8 by the 
failure of the Warehouse Security Company and of two 
houses which had left their regular business to embark in 
enterprises foreign thereto, which were followed on the 
13th by the failure of a large firm of stockbrokers. On 
the 1 8th and 19th two of the largest banking houses in 
the city, well known throughout the country, and which 
were interested in the negotiations of large amounts of 
railroad securities, also failed; and on the 20th of the 
same month the failures of the Union Trust Company, 
the National Trust Company, the National Bank of the 
Commonwealth, and three other well-known banking 
houses were announced. On the same day the New 
York Stock Exchange, for the first time in its existence, 
closed its doors, and they were not again opened for a 
period of ttn days, during which period legal-tender 
notes commanded a premium over certified checks of 
from one-fourth of i per cent to 3 per cent. An active 
demand for deposits commenced on the i8th, and in- 
creased rapidly during the 19th and 20th, chiefly from 
the country correspondents of the banks; and their 
drafts continued to such an extent, "calling back their 
deposits in a medium never before received," that the 
reserves of the banks were alarmingly reduced. 

The "call loans," amounting to more than $60,000,000, 
upon which the banks relied to place themselves in funds 
in such an emergency, were entirely unavailable, because 



337 



National Monetary Commission 

the means of the borrowers upon the reaHzation of 
which they depended to repay their loans were, to a 
great extent, pledged with the banks. These collaterals 
could in ordinary times have been sold, but at that 
moment no market could be found except at ruinous 
sacrifices. Had there been a market, the payments 
would have been made in checks upon the associated 
banks, which would not have added to the general supply 
of cash. A meeting of the clearing-house association was 
called, and on Saturday evening, September 20, the plan 
for facilitating the settlement of balances at the clearing 
house was unanimously adopted. 

The suspension of currency payments followed and was 
at first confined to the banks of New York City, but 
afterwards extended to other large cities, because the New 
York banks could not respond to the demands of their 
correspondents in those cities, and these, in turn, could 
not respond to the demands of their correspondents. 
Exchange on New York, which would otherwise have 
commanded a slight premium, was at a discount, and to 
a considerable extent unavailable. The suspension of 
the banks in other leading cities, almost without exception, 
therefore followed, and their partial or entire suspension 
continued for forty days, until confidence was in a measure 
restored by the resumption of the New York City banks 
on the ist day of November. 

Although predictions had been made of the approach 
of a financial crisis, there were no apprehensions of its 



338 



Crises Under National Banking System 

immediate occurrence. On the contrary there were in 
almost every direction evidences of prosperity. 

The harvest was nearly or quite completed, and the 
bins and granaries were full to overflowing. The manu- 
facturing and miming interests had also been prosperous 
during the year, and there was good promise that the fall 
trade, which had opened, would be as large as during pre- 
vious years. The value of the cereals, potatoes, tobacco, 
and hay for 1872 is estimated by the Department of Agri- 
culture at $1,324,385,000. It is supposed that the value 
of these products for the present year, a large portion of 
which was at this time ready for sale and awaiting ship- 
ment to market, will not vary materially from the above- 
mentioned estimate of last year. An estimate based 
upon the census returns of 1869 gives the probable aggre- 
gate value of the marketable products of industry for the 
year as $4,036,000,000, and a similar estimate upon the 
same basis and upon returns to the Agricultural Depart- 
ment gives an increase of $1,788,000,000 for 1873 over 
the amount for 1868. 

It is not the province of the Comptroller to explain the 
causes which led to this suspension. In order to enter 
upon such an explanation it would be necessary to obtain 
comparative data for a series of years in reference to the 
imports and exports, the products of industry, the issue 
of currency and other evidences of debt, and, in fact, a 
general discussion of the political economy of the country. 
The immediate cause of the crisis is, however, more appa- 
rent. The money market had become overloaded with 
debt, the cost of railroad construction for five years past 



339 



National Monetary Commission 

being estimated to have been $1,700,000,000, or about 
$340,000,000 annually, while debt based upon almost 
every species of property — state, city, town, manufac- 
turing corporations, and mining companies — had been 
sold in the market. Such bonds and stocks had been dis- 
posed of to a considerable extent in foreign markets, and 
so long as this continued the sale of similar securities was 
stimulated and additional amounts offered. When the 
sale of such securities could no longer be effected abroad, 
the bonds of railroads and other enterprises of like 
nature which were in process of construction were thus 
forced upon the home market, until their negotiation 
became almost impossible. The bankers of the city of 
New York, who were burdened with the load, could not 
respond to the demands of their creditors, the numerous 
holders of similar securities became alarmed, and the panic 
soon extended throughout the country. 

The present financial crisis may in a great degree be 
attributed to the intimate relations of the banks of the city 
of New York with the transactions of the stock board, more 
than one-fourth, and in many instances nearly one-third, 
of the bills receivable of the banks, since the late civil 
war, having consisted of demand loans to brokers and 
members of the stock board, which transactions have a 
tendency to impede and unsettle, instead of facilitating, 
the legitimate business interests of the whole country. 
Previous to the war the stock board is said to have con- 
sisted of only 1 50 members, and its organic principle was 
a strictly commission business, under a stringent and con- 
servative constitution and by-laws. The close of the 



340 



Crises Under National Banking System 

war found the membership of the stock board increased 
to i,ioo, and composed of men from all parts of the coun- 
try, many of whom had congregated in Wall street, 
adopting for their rule of business the apt motto of 
Horace : 

Make money; make it honestly if you can; at all events, make money. 

The quotations of the stock board are known to be too 
frequently fictions of speculation, and yet these fictions 
control the commerce and business of a great country, and 
their influence is not confined to this country, but extends 
to other countries, and seriously impairs our credit with 
foreign nations. The fictitious debts of railroads and other 
corporations which they have bolstered up, and which 
have obtained quotations in London and other markets 
of the world, have now been reduced to a more proper val- 
uation, or stricken from the list. 

H: He ^ H: H< 

Many measures of reform are proposed in order that 
the lessons of the crisis may not be lost, and others be 
led hereafter to repeat similar errors. Unity of action 
among the leading banks of the great cities will do more to 
reform abuses than any congressional enactment; for, 
unless such corporations shall unite and insist upon legit- 
imate methods of conducting business, the laws of Con- 
gress in reference thereto will be likely soon to become 
inoperative, such enactments being observed in their true 
spirit by the few, while the many evade them, and thus 
invite a repetition of similar disasters. 



341 



National Monetary Commission 

If, however, the banks are disincHned to unite for such 
a purpose, the legislation required of Congress will be such 
as will induce associations outside of the city of New York 
to retain in their vaults such funds as are not needed at 
the commercial center for purposes of legitimate business. 

INTEREJST ON DEPOSITS. 

In my last annual report I referred briefly to the evils 
resulting from the payment of interest upon deposits, 
and my predecessors have frequently referred more at 
length to the same subject. The difficulty has been 
that the proposed legislation by Congress upon the sub- 
ject would apply only to the national banks. The effect 
of such legislation would be to bring state banks and 
savings banks, organized by authority of the different 
States, in direct competition with the national banks in 
securing the accounts of correspondents and dealers; 
the national banks would be desirous of retaining their 
business, and the more unscrupulous would not hesitate 
to evade the law by offering to make collections through- 
out the country free of charge, to buy and sell stocks 
without commission, and to rediscount paper at low 
rates. The proposed action of the clearing house in the 
city of New York, if adopted by the clearing houses of 
the principal cities of the Union, would do more to pre- 
vent the payment of interest upon deposits than any 
congressional enactment; but the evils resulting from 
the payment of interest upon deposits are by no means 
confined to the city banks. It may be safely said that 



342 



Crises Under National Banking System 

this custom, which prevails in almost every city and 
village of the Union, has done more than any other to 
demoralize the business of banking. State banks, pri- 
vate bankers, and associations under the guise of sav- 
ings banks everywhere offer rates of interest upon de- 
posits which can not safely be paid by those engaged in 
legitimate business. National banks desirous of retain- 
ing the business of their dealers also make similar offers, 
and the result is not only the increase of the rates of 
interest paid to business men, but, as a consequence, 
investments in unsecured loans, bringing ultimate loss 
both upon the shareholders of the bank and the depos- 
itors. The kind of legislation needed is that which shall 
apply to all banks and bankers alike, whether organized 
under the national-currency act or otherwise. A law 
prohibiting the payment of interest on deposits by the 
national banks will have little effect unless followed by 
similar legislation under authority of the different States, 
and there is little hope that such legislation can be ob- 
tained. The national - currency act, which was passed 
during the war, provided for a tax of one-half of i per 
cent upon all deposits, and subsequently internal- 
revenue legislation extended this tax to all deposits 
made with state banks and individual bankers. If leg- 
islation prohibiting the payment of interest on deposits 
shall be proposed, I recommend that this law be so 
amended as to repeal this tax, so far as it applies to 
demand deposits, and that an increased rate of taxation 
be imposed uniformly upon all deposits which, either 
directly or indirectly, are placed with banks and bankers 



343 



National M o n et ar y Commission 

with the offer or expectation of receiving interest. Such 
legislation if rigidly enforced would have the effect not 
only of reducing the rate of interest throughout the coun- 
try, but at the same time preventing the illegitimate or- 
ganization of savings banks, which organizations should 
be allowed only upon the condition that the savings of 
the people shall be carefully and prudently invested and 
the interest therefrom, after deducting reasonable ex- 
penses, distributed from time to time to the depositors 
and to no other persons whatsoever. 

CERTIFICATION OF CHECKS. 

The act of March 3, 1869, authorizes the appointment 
of a receiver "if any officer, clerk, or agent of any na- 
tional bank shall certif)'' any check drawn upon said 
bank unless the person or company drawing the said 
check shall have on' deposit in said bank at the time 
said check is certified an amount of money equal to the 
amount specified in such check." 

Receivers have been appointed during the past year 
for the National Bank of the Commonwealth of New 
York and the New Orleans National Banking Associa- 
tion for violations of this act, and it is the intention of 
the Comptroller to hereafter rigidly enforce this act 
whenever he is satisfied of such violation. 



344 



Note C. 

Extracts from the Annual Report of the Comp- 
troller OF THE Currency (H. W. Cannon) Relat- 
ing TO THE Panic of 1884. 

CAUSES OF NEW YORK BANK FAILURES IN 1884.° 

The most notable national-bank failure of the year in 
the United States was that of the Marine National Bank, 
of the city of New York, which closed its doors about 
II a. m. on the 6th of May. The bank examiners of the 
cit}^ of New York immediately took possession of the bank 
and found that it had been indebted to the clearing house 
that day in the sum of $555,000. The examiner also 
found the account of one firm overdrawn on the books of 
the bank to the amount of $766,570.14. Upon further 
examination it was found that this firm owed a total of 
about $2,430,500, being more than six times the capital 
of the bank. A portion of this indebtedness was in the 
names of other parties — clerks in their office and relations 
of one of the firm. How far the officials of the bank are 
criminally responsible for these matters is a subject now 
under investigation in the courts. The Comptroller finds, 
from the report of the examiner, that this firm had three 
different accounts with the bank — a private account of a 
member of the firm, a general account, and a special 
account. It appears, from an examination of the transcript 

o Report of the Comptroller of the Currency, 1884, pp. 41-43. 



345 



National M on et ar y Commission 

of these accounts, that on May 5 their special account 
was overdrawn by certified checks $383,402.07 and that 
on the same day their general account was also overdrawn. 
It is apparent, therefore, that the bank had violated the 
law in regard to certifications by permitting these over- 
drafts. It is claimed, however, by the officers of the bank 
that these certifications were made against securities 
which were subsequently obtained from the bank by one 
of the firm upon his representations that he had obtained 
a loan upon them elsewhere and would make good his ac- 
count. A further examination of the various accounts of 
the firm shows that while the certification of their checks 
was carried on to an enormous extent, they also made 
very heavy deposits from day to day, and it will, perhaps, 
be very difficult to furnish evidence proving conclusively 
that the checks were certified before the deposits were 
made. 

An examination of the minutes of the board of directors 
of the bank shows that on the nth day of April, 1884, 
twenty-five days before the failure of the bank, the com- 
mittee of examination appointed by the board of directors 
reported that they had examined the securities, counted 
the bills and specie, and examined the balances on the 
ledgers of the bank, and found the recorded statement of 
the 7th of April, 1884, to be correct. The minutes further 
show that the directors were in session about an hour 
before the bank closed. They apparently had no suspicion 
of the state of its affairs, and voted to discount certain 
offerings of commercial paper; and within half an hour 
after the adjournment of this meeting the bank closed its 



346 



Crises Under National Banking System 

doors. It would seem, therefore, that the board of 
directors were grossly deceived as to the true state of 
affairs. 

In this connection I desire to state that the records of 
the comptroller's office show that many of the transactions 
of the Marine National Bank of the city of New York have 
been looked upon with disfavor, and that the association 
has been frequently reprimanded for irregularities during 
the past few years. None of the reports of examinations 
of the bank made to this office, however, disclosed any 
violations of the law forbidding the overcertification of 
ckecks or gave the department any adequate idea of the 
dangerous character of its loans, and this is not surprising, 
the directors of the bank having been equally deceived in 
regard to the situation. 

After reviewing the information in his possession, it 
seems to the comptroller that the failure of the Marine 
National Bank is in consequence of the board of directors 
having chosen for their president a man who was willing 
to risk his own honor and the funds of the bank in specu- 
lation. He joined with himself another, who is now in 
Ludlow street jail under indictment, and who was also a 
member of the board of directors of the bank. While it 
is true that the final failure has shown that there were 
overcertifications on the last day, the comptroller judges, 
from the information which he has received, that the bank 
has been for a long time in the power of the firm to whom 
the certifications were granted, through the president's 
copartnership. This matter was carried to the extent of 
permitting one of the firm to have access to, and appar- 

6158—10 23 347 



National Monetary Commission 

ently free disposal of, the securities left as collateral to 
his loans, and, so far as actual results are concerned, he 
might as well have had the combinations of the cash 
vaults of the bank and helped himself to their contents. 

The Metropolitan National Bank suspended and closed 
its doors about noon on May 14, and opened again for 
business at 12 o'clock on the following day, the bank 
examiner remaining in charge of the bank during its 
suspension. He also remained at the bank during the 
first days of its resumption, and has frequently visited it 
since, and forwarded reports as to its liquidation of 
deposits. Before permitting the bank to resume business 
the comptroller received assurances from the examiner 
that the bank was solvent, and also received telegrams 
from the president and chairman on loans of the New 
York Clearing House, stating that in their opinion the 
bank was solvent and should be permitted to resume. The 
bank is now closing its affairs, having arranged to pay its 
depositors in full and gone into voluntary liquidation 
under sections 5220 and 5221 of the United States Revised 
Statutes. 

It is difficult to determine, in the case of this bank, what 
brought about its suspension. From the information 
which the comptroller has, however, it appears that the 
president of the Metropolitan National Bank had the credit 
at least of being a very large speculator. He was sup= 
posed to be a man of very large means and was interested 
in many enterprises which required the use of large sums of 
money. The general liquidation in railroad and other 
securities which had been going on for the past two years 



348 



Crises Under National Banking System 

had no doubt affected the properties in which the president 
was interested, and the pubUc having become suspicious, 
and apparently beheving that he was a large borrower 
from the bank, and had loaned money to parties who were 
interested with himself, all of whom were assumed to have 
lost largely by this depreciation of property, rumors were 
circulated which excited distrust and suspicion against his 
bank and caused the run upon it which resulted in its 
suspension. Reports of examinations do not disclose any 
overcertification of checks, and I can not conclude that 
irregularities of this kind had anything to do with bringing 
about the suspension. 

The Metropolitan National Bank was examined on 
April 28, 1884. The examination disclosed certain irregu- 
larities, and a letter was promptly written to the bank, . 
requiring the correction of the irregularities, and forbidding 
the declaration of any further dividends until this had 
been done. While this letter was acknowledged, the mat- 
ter was pending at the time of the suspension of the bank. 

The trouble at the Second National Bank of the city 
of New York grew out of a defalcation amounting to 
$3,185,000 by the president of the bank. The amount of 
this defalcation was immediately guaranteed and the money 
paid in by the directors. Owing to this prompt assistance 
the bank did not suspend, and is going on with its business 
in a solvent condition. As far as this office is advised, the 
president used the money in speculations in Wall street, 
and was able to conceal the fact of his misappropriations 
of the funds of the bank on account of the securities being 
kept in a vault located at some distance from the regular 



349 



National M o n et ar y Commission 

banking rooms, which are at the corner of Twenty-third 
street and Fifth avenue. It appears that the president 
had access to these securities without check or hindrance, 
and used them to obtain money for his own private 
speculations. 

In the matter of the failure of the Marine National Bank 
of New York, and the defalcation of the Second National 
Bank of New York, it appears from the information on 
file at this office that there have been not only irregular- 
ities, but violations of section 5209, United States Revised 
Statutes. The United States district attorney at the city 
of New York is in communication with the national bank 
examiner and the receiver of the Marine National Bank in 
regard to these matters, and the facts, which have been 
submitted to this office, the Comptroller has formally 
transmitted to the Attorney-General of the United States 
through the Secretary of the Treasury. 

CIvEARING-HOUSE LOAN CERTIFICATES IN 1 884.'* 

As has been stated, a meeting of the members of the 
New York Clearing House Association was held on May 
14, 1884, to consider what measures could be adopted 
to protect the reserves of the associated banks and to 
prevent suspension of gold and currency payments in 
New York. 

Resolutions were there adopted, which are given else- 
where, authorizing the issuance by the loan committee 
of the Clearing House Association of what were termed 

o Report of the Comptroller of the Currency, 1884, pp. 36-38. 



350 



Crises Under National Banking System 

clearing-house loan certificates, of which the following is 
a copy : 

No. — .] [$io,ooo. 

Loan Committee of the New York 

Clearing House Association. 

New York, May 15, 1884. 

This certifies that the National Bank has deposited with the 

committee securities in accordance with the proceedings of a meeting of 
the association held May 14, 1884, upon which this certificate is issued. 
This certificate will be received in payment of balances at the clearing 
house for the sum of ten thousand dollars from any member of the Clearing 
House Association. On the surrender of the certificate by the depositing 
bank above named, the committee will indorse the amount as a payment 
on the obligation of said bank, held by them, and surrender a proportion- 
ate share of collateral securities held therefor. 



Committee. 



These certificates were to be issued to banks who were 
members of the association upon their securities or bills 
receivable at the rate of 75 cents on the dollar. By the 
cooperation of all the members of the Clearing House 
Association the certificates were accepted in payment 
of balances at the clearing house. Similar resolutions 
were adopted and certificates issued during the panic of 
1873, but this measure of relief was not taken until after 
the panic had assumed such proportions that their use 
and the consequent relief to the banks in settling their 
balances at the clearing house could not restore confi- 
dence. There is little doubt but that the prompt action 
of the associated banks in May last in issuing loan cer- 
tificates had a most excellent effect not only in the city 
of New York but throughout the country. The greatest 



351 



National Monetary Commission 

amount of these certificates outstanding on any one day 
was on May 24, 1884, when they amounted to $21,885,000. 
After that date they were issued in Hmited amounts only, 
and on June 7 their further issue was discontinued. 

Of the 82 banks, members of the Clearing House Asso- 
ciation, only 20 took out these certificates, and several 
of the banks so taking them out did so simply as a pre- 
cautionary measure and did not use them. The total 
amount issued was $24,915,000, and about $7,000,000 of 
these were issued to the Metropolitan National Bank. On 
and after June 10 balances at the clearing house were paid 
in lawful money. The principal security on which these 
certificates were issued consisted of mercantile paper. 

On July I all of the loan certificates, with the exception 
of a portion of those which had been issued by the loan 
committee to the Metropolitan National Bank, had been 
returned to the committee and canceled and the se- 
curities taken up. This bank had been compelled, owing 
to its suspension and the lack of confidence which was 
caused thereby, to liquidate almost its entire deposit 
account, having reduced its deposits from $11,294,000 
in May to $1,338,000 on September 30. Owing to this 
enormous liquidation of deposits the Metropolitan Na- 
tional Bank was unable to collect its loans and realize 
upon its securities with suflicient promptness to cancel 
its loan certificates by July i, and as these certificates 
bear interest at 6 per cent and are secured by a deposit of 
ample collaterals, as heretofore stated, the associated 
banks were willing to carry them as loans, and on October 
3, 1884, were still carrying $5,290,000 of the certificates 



35a 



Crises Under National Banking System 

issued to the Metropolitan National Bank. Since that 
time this bank has gone into voluntary liquidation, and 
these certificates will be paid and canceled as rapidly as 
the collection of the securities upon which they are based 
can be made. 

The following table shows the aggregate issuance and 
cancellation of clearing-house certificates from day to 
day from May 15, 1884, to October 3, 1884: 



May 15. 
16. 



22. 



23 

24 

26 

27 

28 

28._ 

29 

June 2 

3 

4 

5 --- 

6 

June 6 to July i . 

July I to Aug. I _ 

Aug. I to Sept. I . 

Sept. I to Oct. 3. 



Total . 



Issued 



i!3, 820, 000 

6, 885, 000 

6, 740, 000 

1 , 190. 000 

I, 950, 000 

580, 000 

I , 560, 000 

140, 000 

180, 000 



640, 000 



700, 000 

335.000 

70, 000 

40, 000 



85, 000 



24, 915, 000 



Canceled. '■ Outstanding. 



$200. 000 



800. 000 



160, 000 
415, 000 
460. 000 
450, 000 
400, 000 

I, 100, 000 
90, 000 

I , 030. 000 
120. 000 

1 . 050, 000 
9, 070, 000 

2, 850, 000 
I, 220, 000 

210, 000 



820, 000 
70s, 000 
445.000 
435, 000 
385, 000 
165, 000 
725. 000 
865, 000 
885,000 
470, 000 
650, 000 
200, 000 
500, 000 
735,000 
7 IS. 000 
725, 000 
605, 000 
640, 000 
, 570, 000 
- 720, 000 
, 500, 000 
290, 000 



IIvLEGAIv CERTIFICATION OF CHECKS." 

In reference to the matter of illegal certification of 
checks by the national banks of the city of New York, 

"Report of the Comptroller of the Currency, 1884, pp. 44-50. 
353 



National Monetary Commission 

the records of this office show that immediately upon the 
passage of the act of July 12, 1882, the bank examiner of 
New York City was directed to furnish information as to 
whether it was the custom and practice of the national 
banks of that city to certify checks in violation of section 
13 of that act and section 5208, United States Revised 
Statutes. Many of the banks in New York immediately 
took advice of their attorneys, and opinions were sent to 
this office which were deemed of importance in the matter. 
The main point of these opinions was that the certifica- 
tions forbidden were a form of acceptance, and that the 
right to make a general acceptance was not interfered 
with, reference being made to the third clause of section 
5136, United States Revised Statutes, which confers upon 
national banks the power to make contracts. Many of 
the banks of New York, acting upon these opinions of 
their attorneys, changed the form of certifications, and 
the majority of the banks seem to have stamped their 
checks for the purpose of certification with the word 
"accepted," giving the date, and with the name of the 
teller written underneath. 

On October 4, 1882, a letter was addressed to the Sec- 
retary of the Treasury asking him to refer certain ques- 
tions which had arisen under the law to the Attorney- 
General for an opinion. 

On November 24 the Attorney-General returned his 
opinion. In reply to the first question, whether a national 
bank had the right to accept checks drawn upon it unless 
the drawer has the amount stated in the check actually on 
deposit in the bank, he replied in the negative. To con- 



354 



Crises Under National Banking System 

strue otherwise he held would be to allow a device to 
evade the provisions of law. 

In reply to the second question, whether an acceptance 
under such circumstances would create a liability to the 
bank for money borrowed, and as such be subject to the 
limitation of section 5200 of the Revised Statutes, con- 
fining such liability to one-tenth of the capital stock of 
the bank, the Attorney-General replied in the negative, 
as the acceptance under such circumstances would not be 
a loan of money but of credit. 

To the third question, as to whether such acceptance to 
an extent greater than the capital of the bank would be a 
violation of section 5202 of the Revised Statutes, the 
Attorney-General replied in the affirmative. 

Immediately upon receipt of this opinion the banks 
were notified of the same, and warned that due regard 
must be had to the law as interpreted. 

On July 19, 1883, a circular letter was sent to the New 
York banks asking information as to the large amount of 
certified checks and acceptances appearing in their last 
previous quarterly report, to v\^hich answers were duly 
received. 

By an examination of the Wall Street National Bank, 
made on September 4, 1883, what appeared to be a clear 
case of violation of law was discovered, and a letter was 
addressed by my predecessor to the Secretary of the 
Treasury, inclosing a copy of the report, and asking him 
to transmit it to the Departmentof Justice for action. 
Although an endeavor was made by the district attorney 
to have all the officers of the bank indicted, yet the grand 



355 



National Monetary Commission 

jury found an indictment only against the teller of the 
bank. When brought up for trial he plead guilty, but 
presented an affidavit showing that he had acted under 
the direction of his superior officers. The judge sus- 
pended sentence to admit of evidence of the implied 
charge against these officers. The district attorney was 
heard in this matter before a United States commis- 
sioner, and presented evidence against the officers, and a 
decision has been rendered holding all the officers for 
trial, as follows: 

The teller, , stands indicted for the offense with which the 

defendants here are charged, and I am informed that the court has sus- 
pended action pending proceedings to ascertain the relations of the prin- 
cipal officers of the bank to the transactions in question. The bank 
examiner, during his examination, stated that this was the first case arising 
under the law in which proceedings had been instituted. I feel the 
delicacy of my position in having to pass upon the questions involved in 
the absence of any adjudication. It appears that the defendants, Evans 
and Timpson, had no knowledge of these transactions with reference to 
Cecil, Ward & Co., and it had been suggested in the course of this exam- 
ination that they be regarded as practically out of the investigation. The 
statute reads, "Any officer, clerk, or agent who shall," etc. The clerks 
did not adopt the plan of accepting checks in lieu of certifying. What part 
the cashier may have had in the adoption of it remains to be seen. I do 
not regard him as necessarily the guilty party or the only offender simply 
because he carried out the instructions of the bank or its policy. The 
device which constitutes this evasion need not to have originated on the 
day in question when it resulted in the violation of the law. The cause, 
the device, may have originated long prior. I shall surely hold those who 
caused the violation. From the evidence before me I can not avoid the 
conviction that the model of accepting was resorted to purposely to avoid 
the law; in other words, that they might in this way give customers credit 
beyond the amount of their deposit; that is exactly what the law forbids 
by certified checks, and it forbids it also by resorting to a device to accom- 
plish it otherwise. That the law has been violated I have no doubt. Whom 
of the defendants should be adjudged the guilty party, and whether one or 
more is for the court to determine and not for me to say. I have come to 
the conclusion to hold all the defendants, that all questions presented by 
this case may be fully heard and determined by the court. 



356 



Crises Under National Banking System 

The reports to Congress of my predecessor, the Hon. 
John Jay Knox, for the years 1882 and 1883, contained 
full information in regard to the certification of checks, 
legal and illegal, and enumerated the numerous ways there 
were of evading a technical violation of the law. At the 
same time a history of the growth of the practice of certi- 
fying checks was given. Certification was in use as a 
method of business for more than thirty years previous 
to the organization of the national banking system and at 
least twenty years previous to the establishment of the 
clearing house. It is the province of the office of the 
Comptroller of the Currency to call the attention of the 
proper officers of the Government to evidence by which 
violations of law may be punished. In regard to over- 
certification of checks, unless they result in loss, it is 
almost impossible to obtain evidence which will convict 
the offenders. The examiner can not be in the bank at 
all times. He must depend for his knowledge of its 
business upon an examination of its books and accounts 
and the general conduct of its business while he is making 
his examination. In any case of certification, where no 
loss is encountered, the books at the close of the day, as a 
rule, show deposits equal to or greater than the checks 
drawn. In the case of the Wall Street National Bank a 
loss occurred by which the violation of the law was made 
apparent, and proceedings were commenced. In the case 
of the Marine National Bank, the Comptroller judges from 
the information on file that there is good evidence of over- 
certification, and, as has been seen, action has already 
been taken by the United States district attorney. It has 



357 



National Monetary Commission 

been stated to the Comptroller that on the day of the sus- 
pension of the Metropolitan National Bank many of the 
brokers engaged in business on Wall street, in New York, 
were very indignant at the national banks because they 
would not overcertify their checks and in this way lend 
their credit to afford the brokers relief in the emergency. 
It is the opinion of the Comptroller that since the passage 
of the act of July 12, 1882, the officers of the national 
banks of New York have given the matter of certification 
of checks their serious attention, and that they have 
endeavored to diminish the dangerous features of this 
method of doing business. 

After the passage of the act of July 12, 1882, my pred- 
ecessor suggested the establishment of a stock clearing 
house to enable the brokers to make their settlements 
without calling upon the banks to certify their checks for 
the purpose of clearing their stocks. This matter has 
received careful consideration by the brokers and bankers 
of New York. No plan has yet been suggested, however, 
which has seemed to meet the peculiar requirements of 
the stock-exchange business in New York. The Comp- 
troller hopes that the recent troubles growing out of Wall 
street speculations will force the bankers and brokers of 
New York, for their own protection, to agree upon a stock 
clearing-house system, and he believes that the present 
is an excellent time for the conservative bankers in the 
city of New York to make a move in this matter. 

The Comptroller believes, however, that overcertifica- 
tion of checks, viz, the certification of checks as "good" 
when no funds are to the credit of the drawer of the checks, 



35S 



Crises Under National Banking System 

is not only practiced for the accommodation of the brokers 
who deal in stocks, but is also done for the accommodation 
of the dealers in produce. These dealers often require 
large temporary accommodations of money to take up 
bills of lading for produce which has been shipped to them 
from the interior, and which they desire to take from cars 
and warehouses for shipment abroad, and some accom- 
modation is necessary in the interim until the ocean bills 
of lading can be obtained and exchange drawn against 
the consignment. While this practice is reprehensible and 
is not legitimate as a banking transaction, business has 
been and is carried on in this manner, and the fact that 
the national banks of the city of New York are endeavoring 
to comply with the law in regard to illegal certification of 
checks has caused many dealers in produce to withdraw 
their accounts from the national banking associations and 
has largely increased the business of certain of the state 
banks, which are under no restrictions of law in this 
matter. This is particularly noticeable in the case of the 
bank which was organized under the auspices of the New 
York Produce Exchange. 

BANK EXAMINATIONS. 

The recent financial disturbances throughout the country, 
and the consequent failures of national and state banks, 
have called the attention of the public to the official 
examination of banks as conducted under the authority 
of the national-bank act, and under various state laws. 

The national-bank act provides for the issue and regula- 
tion of a national currency secured by United States bonds, 



359 



National Monetary Commission 

and provides, also, for a banking system, in order to facili- 
tate the issue of this circulation. It contains provisions 
bestowing certain privileges upon the banks organized 
under it, and provides many safeguards for the public by 
imposing on these banks such restrictions as the history 
of banking throughout the world has seemed to indicate 
were of a character to create a safe and permanent banking 
system. This law has been amended and improved from 
time to time, but it is not supposed that the national bank- 
ing system is absolutely perfect, nor that imprudent bank- 
ing under it can be altogether prevented. 

In order to enable him to ascertain if the provisions of 
the law are followed, section 5240, Revised Statutes, 
authorizes the Comptroller to appoint suitable persons to 
make an examination of the affairs of every national 
banking association. It has been customary from the 
establishment of the system to have a regularly appointed 
examiner visit each national bank at least once a year, in 
many cases twice a year, and when deemed necessary, 
even more frequently. The examination of national banks 
is conducted by the examiners in accordance with instruc- 
tions issued from this office, which instructions, both 
general and specific, have grown with the growth of the 
system. The first general instructions to examiners were 
issued September 15, 1864, by the Hon. Hugh McCulloch, 
then Comptroller of the Currency, and as the bank act has 
been amended and revised these instructions have been 
altered as circumstances seemed to warrant. It has been 
the aim of the Comptroller to increase the efficiency of the 
examinations by carefully noting the causes that have in 



360 



Crises Under National Banking System 

particular cases led to the suspension or failure of national 
banks, and calling the attention of the examiners to these 
causes, suggesting such methods of examination as seemed 
to be best calculated to prevent repetition of such disasters, 
and to expose violations of law which led to the same. 

This official inquiry into the affairs of a national bank 
does not end with the mere inspection of the cash, bills 
receivable, books, and accounts of the association, but the 
examiners are instructed to closely scrutinize the busi- 
ness of the bank, to investigate the standing and fitness 
for their positions of the persons to whom the manage- 
ment of the affairs of the association are intrusted, and 
the manner in which the business is usually conducted, 
whether prudently or otherwise; to ascertain as far as 
possible the character of the loans and discounts of the 
bank and what losses, if any, have been or are Hkely to 
be sustained. 

The examiner is also instructed to ascertain how fre- 
quently the board of directors meet together to consult in 
relation to the affairs of the bank, and to discover, if pos- 
sible, any malfeasance in office or willful neglect of busi- 
ness on the part of the management; and is, moreover, 
particularly instructed to report to the Comptroller 
whether any excessive accommodations are granted in 
violation of section 5200, Revised Statutes, and to note if 
the officers of the bank are borrowing largely from the 
association ; to ascertain the customary state of the lawful 
money reserve by examining the daily statements from 
some time previous to the examination; whether or not 
the bank borrows money to loan again ; and in short, to dis- 



«36i 



National Monetary Commission 

cover and report to this office all violations of law of what- 
ever character. 

Upon receipt of the report at this office all matters above 
mentioned, and such others as may be referred to therein, 
are carefully reviewed and considered, and the directors 
of the bank are immediately notified of all violations of 
the law, and they are required to have the same promptly 
corrected. The attention of the directory is also specially 
called to the reform of such matters as are deemed detri- 
mental to the safety and welfare of the association. 

The general public do not understand the amount of 
labor performed weekly, monthly, and yearly by the exam- 
iners of national banks, many of whom have for years 
rendered most excellent service. It can hardly be ex- 
pected, however, with the limited compensation allowed 
by law for making these examinations, that the Comptroller 
can in all cases retain the services of the most expert 
accountanj:s, although by systematic division of the labor 
he has endeavored to obtain the best results possible under 
the circumstances." 

For the purposes of bank examination the United States 
is apportioned into 25 districts, bank examiners being 

o It is submitted that the compensation allowed national-bank exam- 
iners by section 5240, Revised Statutes, is often insufficient. The assess- 
ments upon the banks, by which the law provides that the examiners' fees 
shall be paid, are based upon the capital of the national banks examined, 
and vary, according to capital, from $20 to $75. In many instances the 
capital is not the proper basis upon which to compute the compensation 
of national-bank examiners, as many banks with a comparatively small 
capital have large lines of deposits, and consequently do a much larger 
business and require more time and labor from the examiner than other 
associations with the same capital. The Comptroller is 6i the opinion that 
the fees paid to national-bank examiners should be based upon the capital 
and average deposits of the national banking association. 

362 



Crises Under National Banking System 

stationed in each district. Important reserve cities, 
such as New York and Boston, generally form a district 
of themselves, and the duties of the examiner stationed 
there are usually confined to that city and its immediate 
vicinity. Owing to the nature of the work, the position 
of a national-bank examiner is one of great responsibility. 
Notwithstanding this vigilance, the most competent ex- 
aminers are liable to be deceived, and sometimes find it 
impossible to discover and remedy in time even gross 
mismanagement of the affairs of national banks. 

No laws or system of examinations will prevent dis- 
honest men from keeping false accounts and rendering 
untrue statements, and by means of these and other de- 
vices they can conceal from the examiner the fact that 
they are using the money intrusted to their charge in 
private speculations until final disaster makes longer dis- 
guise impossible. It is thus exceedingly difficult to detect 
violations of law or misuse of the funds of a bank. 

The surest preventive is to have an honest, active, and 
competent board of directors. A rogue or a dishonest 
man who acquires the confidence of his associates to such 
an extent that he can appropriate the funds of a bank 
for his own use without their knowledge or that of the 
board of directors, can have but little trouble in deceiving 
the examiner and hiding his peculations from him. 

In times of financial disaster and of a stringent money 
market the acts of dishonest and corrupt officials in any 
bank or banking firm or private corporation are more 
liable to be discovered, and naturally during the past 
year the consequences of disastrous speculation, which 

6158—10 24 363 



National Monetary Commission 

had been for a long period carried on with impunity with 
the aid of misappropriated funds, have been brought to 
the surface. Men who were supposed to be worthy of 
the entire confidence of communities, whose character 
stood so high that they were intrusted not only with the 
management of corporations, but with the investment of 
private funds, have now been proven to have dishonestly 
betrayed their trust. Never were the instances of this 
kind more numerous than during the financial troubles of 
the present year. 

Such practices and the resulting disasters, however, do 
not prove that the national banking laws are inefficient, 
or that the national-bank examiners do not do their duty. 
They rather indicate that the shareholders of joint-stock 
corporations of all kinds, and particularly those of banks, 
should be more careful to elect men as directors and 
trustees who are competent and who will exercise proper 
care and supervision over the management of the affairs 
intrusted to them, who will select competent and honest 
officers, provide suitable rules and regulations for the 
conduct of the bank, keeping its accounts, etc., and ap- 
point regular committees of examination, whose duty it 
shall be not only to verify the accounts but to keep a 
watchful eye over the affairs of the association and the 
officers who immediately carry them on. 

The public frequently draw wrong deductions as to the 
responsibility of the Government and the bank examiners 
in particular cases. For instance, in many cases where 
failures occur the principal cause is found in the character 
of the loans made, which are either excessive or made on 



364 



Crises Under National Banking System 

improper security. There are 2,671 national banks in 
the country. The loans and discounts of the banks at 
the close of business September 30 aggregated more than 
$1,240,000,000, and it is of course not the province of the 
bank examiners to supervise the making of these loans. 
Section 5200, Revised Statutes, provides that no loans 
shall be made to any one individual, firm, or corporation 
in amount exceeding one-tenth of the paid-in capital of a 
bank, but there are many ways of evading this law, and 
it is a physical impossibility for the Government to main- 
tain the constant espionage over the affairs of the national 
banks which alone would prevent the violation of this 
statute. Any attempt to direct the making of loans and 
to dictate to the directors and managers of the national 
banks throughout the country as to what use they shall 
make of their funds would of course be impracticable. 

Many instances occur daily, which are not seen or known 
to the general public, where the banks are notified of vio- 
lations of law, and where their condition is improved by 
action upon the reports of the examiner. When, however, 
some unexpected failure occurs, brought about by inju- 
dicious banking, bad management, or adventurous specu- 
lation, or by dishonesty and fraud on the part of the 
officers or directors, who are the very men to whom the 
examiner must more or less look for information, the Gov- 
ernment and the national banking laws are unjustly criti- 
cised. The fault is not with the law and not with the 
examiner, on whose reports the directors have very likely 
been notified and warned to exercise more care in the man- 
agement of their affairs and to hold their officers in check. 



365 



National M on et ar y Commission 

A national bank being a joint stock association, its 
aggregation of capital having been brought together by 
bankers or other persons for the purpose of utilizing more 
effectually the resources of the locality in which it is doing 
business, it is not the intention of the bank act to inter- 
fere with the business of said association so long as it is 
conducted in accordance with the law. The exact line at 
which the Government shall interfere and the point at 
which government discipline shall commence is a matter 
of some delicacy to determine. It is exceedingly difficult 
to add materially to the restrictions of the national-bank 
act without such an interference with the business of the 
banks as would be practically prohibitory, for it is well 
known that banking can be carried on under the laws of 
most of the States of the Union with but very little inter- 
ference and scarcely any espionage on the part of the 
officials of the state government. It is because the na- 
tional banking system has raised the standard of banking, 
and because it is generally understood that money depos- 
ited with a national bank is as a rule much safer than in 
institutions not under similar restrictions, that bankers 
and capitalists avail themselves of the national-bank act 
in order to gain the confidence and thereby the deposits- 
and business of the public. 

The act appears to contain ample provisions for the 
punishment of criminal offenders, and the Comptroller is 
of the opinion that it is not so much the lack of law as it 
is the difficulty of detection of offenders and of obtaining 
sufficient evidence to convict that has prevented the pun- 
ishment of officers and others connected with the national 



366 



Crises Under National Banking System 

banks who have violated the criminal sections of this act. 
In some cases the directors and shareholders of banks have 
apparently suppressed information and evidence, and in 
many instances it has been with great difficulty that the 
Comptroller was able to present the necessary facts to the 
Department of Justice to make a case. For obvious rea- 
sons the number of instances in which this office has en- 
deavored to secure the arrest and conviction of offenders 
by reporting to the proper officers of the law facts that 
came to the knowledge of the Comptroller which seemed 
to indicate certain violations of law can not be presented, 
but it is believed that the records of the various State 
and United States courts show a larger number of indict- 
ments and of convictions for violations of the national- 
bank act than is generally known to the public. 

It is possible that the provisions of the act relating to 
the punishment of offenders in the matter of false oaths 
of officers of banks with intention of deceiving the Comp- 
troller as to the correctness of reports might be profitably 
amended. The Comptroller is of the opinion that if the 
criminal provisions of the bank act are to be amended, the 
Department of Justice of the United States should be con- 
sulted for suggestions as to any weakness or defect in the 
existing law. 

INTEREST ON DEPOSITS." 

The practice of paying interest on deposits by the na- 
tional banks has been the subject of discussion for some 
time past. It is the custom of the country banks to pay 
interest on current accounts and also to issue certificates 

o Report of the Comptroller of the Currency, 1884, pp. 57-59. 
367 



National M on et ar y Commission 

of deposit bearing interest, which latter usually state 
upon their face that no interest will be paid for three, 
six, nine, or twelve months, as the case may be. 

Banks located in the cities where a portion of the law- 
ful money reserve of the country banks may legally be 
kept have been for many years in the habit of paying 
interest upon the daily balances of the accounts of their 
country depositors. Owing to the fact that the banks in 
the reserve cities other than New York keep large cur- 
rent accounts with their correspondents in that city, 
who in turn pay interest on the average daily balances 
of their correspondents, the result is that in times of easy 
money large sums accumulate in the city of New York 
subject to interest on current account. It is believed 
that this accumulation of money in the New York banks 
occasioned by this custom has a tendency to encourage 
speculation in stocks, as these banks are compelled to 
find some use for the money deposited with them on which 
they are in turn compelled to pay interest, and as this 
money is liable to be called for at any time it is necessary 
to make loans payable on demand; and dealers in stocks 
called on the stock exchange, which theoretically can be 
readily sold at any time, are in consequence enabled to 
obtain money for speculation by pledging these securities 
as collateral and agreeing to repay the sum advanced on 
demand. The panic of 1873 and the financial troubles of 
May, 1884, have shown that these so-called "demand" 
loans are of such a character that the banks are not 
always able to realize upon them in case of emergency. 
The members of the New York Clearing House Associa- 



368 



Crises Under National Banking System 

tion after the panic of 1873 discussed the aboHtion of the 
payment of interest upon current accounts. Again, upon 
the 4th of June, 1884, the association endeavored to have 
its members agree to discontinue the payment of interest 
on daily balances; but owing to the persistent dissent of 
a few members the association was unable to make the 
arrangement . 

While the united action of the Clearing House Associa- 
tion in favor of the abolition of the payment of interest 
on deposits would doubtless have great effect, yet so long 
as it is the almost universal custom of banks, state and 
national, and of private bankers throughout the country, 
to pay such interest it is probable that if the associated 
banks shall discontinue the practice they would do so to 
their own great detriment and loss of business. Many 
of the accounts of country banks and out-of-town corre- 
spondents would be transferred to the trust companies, 
state banks, and private bankers who are not members 
of the association and who would not be bound by its 
regulations, and for this and other reasons it seems very 
difficult to bring about an absolute cessation of the prac- 
tice. Until all the bankers in the principal cities of the 
country agree to discontinue the payment of interest it 
is probable that it will continue to be paid upon current 
accounts. 

It has been held by the courts that the conferring of 
special powers upon national banking associations pro- 
hibited them from the exercise of certain other powers 
not specifically conferred, and the decisions of the United 
States courts seem to indicate that it is unlawful for a 



369 



National Monetary Commission 

national bank to borrow money to lend again, or to re- 
ceive deposits payable at fixed future dates with interest 
thereon. 

Notwithstanding the fact that it has been held that 
national banks could not receive deposits payable other- 
wise than on demand, it is possible that in view of the 
fact that the custom of purchasing deposits by the pay- 
ment of interest is so universal the courts might hold 
that national banks would have the same rights as other 
bankers to receive deposits subject to repayment upon a 
notice of from five to thirty days; and if this should be 
the case it is submitted that they should pay interest 
only upon deposits of this character, for there can be 
no doubt that it is extremely injudicious to receive cur- 
rent accounts payable on demand subject to interest. 
It would appear that if this course was adopted two 
classes of accounts would have to be maintained with 
most of the country correspondents of national banks in 
reserve cities, as it would be impracticable for a national 
bank in the interior to have any portion of its reserve 
deposited in such a manner that it could not be drawn 
upon demand. In view of the facts as stated, it is doubt- 
ful if any legislation upon this matter should be had 
which would discriminate against the national banks. 



370 



Note D. 
Banking Reform Proposals in New York in 1884. 

A. — address of GEORGE S. COE.'' 

At a meeting of the New York Clearing House Asso- 
ciation, held on Wednesday, June 4, 1884, E. H. Perkins, 
Jr., Esq., chairman, presiding, the following resolution was 
unanimously adopted, viz: 

Resolved, That the experience of the associated banks in the New York 
clearing house during the recent panic, having again shown that every 
member of the association, in a time of general and serious financial dis- 
turbance, is involuntarily compelled to make common cause with every 
other member in the risks attending any practical expedient for general 
relief, or of any effective combination for the public good, it is therefore 
proper and necessary to enquire whether the methods of business, as con- 
ducted by the several members of this association, are uniform and correct 
in their operation with the public, and equitable to all the banks which 
are thus bound together in the Clearing House Association. 

Mr. George S. Coe, president of the American Exchange 
National Bank, in presenting this resolution, made sub- 
stantially the following remarks, which were ordered to 
be printed for the use of the members: 

Mr. Chairman: In offering this resolution, I may at first warmly con- 
gratulate this association and the country at large, upon the great good 
which has been accomplished in the recent financial crisis by means of the 
organized power of this combination of banks. 

After the failure of the Marine Bank, followed as it was so soon, by the 
announcement of the startling events connected with the Second National, 
the whole community was stirred to its depths with excitement and 
apprehension, fearing every form of financial disaster. The reputation 
before enjoyed by these institutions and the eminence of some of the men 
directly and indirectly involved in their failure were such that faith in 
human character was for the moment almost destroyed. 

a Bankers' Magazine, July, 1884, pp. 44-51. 
371 



National Monetary Commission 

As bank officers, we were called here together suddenly by the prompt- 
ness of our friend Mr. Tappen, and unanimously decided to reestablish our 
clearing-house expedient for the issue of loan certificates, which had 
proved so effective in former great public exigencies, and we appointed a 
committee of safety to provide for any new event that might occur. 
Immediately after that meeting the suspension of the Metropolitan National 
Bank was reported, which added still greater intensity to the already 
inflamed condition of the public feeling. 

Under these circumstances the clearing-house committee were sum- 
moned together at midnight to examine the condition of that institution 
and to decide what action should be taken respecting it. A fearful respon- 
sibility was thus hastily thrown upon that committee. It was impossible 
in a few short hours, and in the apprehension of further possible events, 
to reach a definite conclusion upon the value of the large and diversified 
assets of that bank. When we examined its books, this most important 
fact at once appeared: That it owed some eight to nine millions of deposits, 
a large proportion of which consisted of the reserves of interior banks, 
which could not be imperiled or locked up for another day without pro- 
ducing a further calamity of widespread dimensions throughout the 
country. It was also evident that the consequent certain suspension of 
many banks in the interior cities would occur, and be followed by the 
suspension of business men depending upon them, and by heavy drafts 
upon those banks which held similar deposit reserves, and that the imme- 
diate danger to our city institutions was great, just in proportion to the 
extent of such liabilities and to the amount that each bank was expanded 
relatively to its immediate cash in hand. That, should the threatened 
wild excitement pervade the country, a general suspension of banks, 
bankers, and merchants was inevitable, and in such case the magnitude of 
the loss to every institution would be incalculable. 

The committee therefore came to the unanimous conclusion that it was 
better to confront the risk of losing one or two millions, if need be, by tak- 
ing possession of the total assets of that bank, and by paying off its depos- 
itors, rather than by waiting to incur the hazard of an mdefinite and greater 
loss, by a general financial and commercial derangement throughout the 
country; and that it was their manifest duty to promptly accept this grave 
responsibility, confidently relying upon their associates for approval and 
support. On behalf of the combined capital and surplus of the banks in 
this association, amounting to about a hundred millions, and also to pro- 
tect the property and assets held by them together, of more than three 
hundred millions, your committee unhesitatingly acted, and thus saved the 
nation from immeasurable calamity. The Metropolitan Bank was, obvi- 
ously, the key to the whole situation. When this decision was announced 
the next morning, confidence was instantly restored and business resumed 
its even tenor. Seven-eighths of the deposits of the Metropolitan Bank 
have already been paid off. Its many shareholders have been saved from 



372 



Crises Under National Banking System 

threatened personal responsibility, and time is gained in which its large 
property may be more deliberately converted into money. The restora- 
tion of confidence was as sudden as was its loss; so sudden, indeed, that 
the immensity of the danger can now hardly be appreciated. 

I rapidly review these important events, Mr. Chairman, because they 
have once more illustrated the power and importance of this voluntary 
association, and have also shown how the several members comprising it 
are mutually dependent upon it and upon each other in any great emer- 
gency for the safety and stability of their own banks. 

It must be borne in mind that the banks in New York, holding as they 
do the reserves of other institutions and of bankers in this city, and also 
of banks and bankers throughout the country, and standing between home 
and foreign commerce, are the last resort of this whole nation for cash 
reserves, and that a financial disturbance or distrust in any part of the 
land is sure to bring upon them a greater or less demand. Acting singly 
and alone, what could each one of sixty or seventy independent institu- 
tions have done to stem the tide, which, in such an unnatural and simul- 
taneous call for money from every quarter of an alarmed nation, must have 
swept over them? No time was allowed to any bank to gather in its 
loaned resources, and no power on earth could so suddenly respond to a 
demand that — not any natural commercial want, but — general demorali- 
zation and wild panic alone had so unexpectedly created. It is perfectly 
apparent that without this combined support each bank would have been 
not only powerless in itself but the occasion of peril to others. It vpas 
only because we were thus associated and had in hand the printed forms 
and instruments provided in past experience that we were able at the tap 
of the drum instantly to fall into line and present an unbroken front and a 
disciplined force to this formidable enemy. Our numbers, now no longer 
a weakness, were thus converted into the greatest strength, and we were 
able easily to carry away this heavy and disabled member, and to relieve 
its creditors, shareholders, and friends from the danger of utter destruc- 
tion, and also to arrest the panic so rapidly spreading. I think the asso- 
ciation may well feel proud of this achievement, which for promptness, 
efficiency, and breadth of influence has no superior in the annals of com- 
merce. 

Now, the association being of such importance and the connection with 
it of each member being of this peculiar character, how can any honorable 
gentleman among our number claim the right to selfishly pursue his busi- 
ness in utter disregard of these delicate relations by which the association 
itself is sustained and the business of the nation is safely conducted? We 
are in a most important sense directly responsible for each other and can not 
avoid being disturbed by the ignorance, selfishness, or immoral conduct of 
our most remote members. 

Crises will arise in the future as in the past, and it is not only just but 
necessary that we adopt such safe and uniform methods of business as expe- 

373 



National Monetary Commission 

rience has approved, that we clearly understand what those methods are, 
and freely invite from each other the utmost scrutiny in their ofjservance. 
In the light of recent experience, it seems no longer credible or possible that 
an intelligent body of men, composing an association of such dignity and 
importance as this, can deliberately consent to remain responsible partners 
in times of peril with those who are eager competitors and antagonists in 
days of prosperity. The burdens, responsibilities, and profits of this great 
trust ought to be shared together upon recognized and uniform conditions, 
with special reference to the public welfare; and the only basis of competi- 
tion for such business should consist in superior character, fidelity, and 
intelligence in its management. Thus can this association become one 
homogeneous body, composed of many members, like the Government 
under which we live, and capable of efficiently performing the highest 
duties, such as single financial institutions — conformably to their political 
constitution — in older countries, render to commerce, in being the safest 
custodians, and the ultimate resort of the money reserves of the people. 

The issue of loan certificates, although practically equivalent to a supple- 
mental issue of currency, exclusively for local uses between the members of 
the association, are only, in fact, convenient instruments by which the bills 
receivable and negotiable securities belonging to one bank are readily trans- 
ferred to another, in exchange and as a substitute for its ready money, 
thus covering the weaker by the stronger, and, in fact, by all the other banks 
in the association during a time of common peril. For the time being, these 
certificates form a connecting medium between the banks, by which they all 
substantially become one in power, through the ebb and flow of the vital 
elements which compose them, and by which their total money in hand is 
made available at any special point of danger. In one sense our action 
was outside of law. In fact, the law could never anticipate such experience, 
nor establish a union so effective, and any legislation to enforce such gen- 
erous and voluntary cooperation would only prevent it. The occasion was 
sudden and momentous, and the banks proved equal to the occasion. It 
was the same after the panic of 1857, when, as state institutions, our similar 
organization first originated. Also in 1861, after the battle of Bull Run, 
when with our colleagues in Boston and Philadelphia we united and fur- 
nished the Government from week to week in its greatest extremity a total 
of $150,000,000 in gold. Likewise in 1873, when the country was again 
convulsed by financial trouble. In all these great financial disturbances — 
each one like the present, but originating from a different cause — the benefi- 
cent influence and power of this association were fully illustrated, and some 
of us now present can bear testimony to the fact that several banks here 
represented owe their continued existence to the protection afforded them 
upon one or another of those important occasions. 

I appeal to you members of the association to give this subject the 
most serious consideration. We are responsible not alone to our directors 
and stockholders. Our responsibility takes a far wider range. Like the 

374 



Crises Under National Banking System 

Bank of England in the British financial system, the banks composing 
the New York Clearing House Association are the final reservoirs of the 
cash reserve of the nation and its refuge in commercial commotion. Every- 
one of the thousands of banks and bankers throughout the land has inti- 
mate financial relations with us, and all the multitudes who depend upon 
them are thus indirectly concerned in the stability and safety of our 
methods of daily business. Every added facility of communication or of 
commerce only tends more closely to unite us to them and ourselves to 
each other. The very conditions of modern life compel us to be more 
and more mutually dependent. 

There are three special abuses to which I desire for a moment to call 
your attention. 

First. The payment of interest upon deposits of money payable on 
demand. This subject has upon several occasions in years past been under 
consideration, and its total abolition has been almost unanimously agreed 
to among our banks by written contract. Yet by the refusal of one or 
more members it has failed to become a binding obligation. Like some 
other great reforms, this one does not admit of partial application or of 
compromise. Any attempt to make exceptions to the prohibition among 
partners mutually dependent can only result in entirely releasing them all 
from any obligation respecting it. Yet every banker will freely admit 
that the purchase of deposits payable on demand operates, in some degree, 
as an absolution of the obligation to be always in condition to meet the 
contract. Both the giver and receiver of interest on such deposits, by 
the nature of the business, substantially, though not expressly, agree 
to such use of the money as may prevent its immediate return. 

What, Mr. Chairman, is the nature of bank deposits? Every responsible 
person in regulating his own affairs must withhold from permanent 
investment and keep in ready money enough for his current wants. This 
is his reserve. When such sums, for greater safety, are placed in charge of 
another person, they do not lose their essential character; and when they 
become further aggregated and pass into the possession of a bank or 
banker they are still subject to the same immediate wants of every original 
owner for the very purpose for which he set them aside. And when these 
rivulets of capital become streams, and streams gather into rivers and flow 
toward the ocean until they reach this city, where they come into financial 
relations with other men in other continents, the parties who here take 
them in charge assume new and accumulated responsibilities. They are 
subject not only to the necessities of the people at home but also to the 
world-wide influences of commerce. 

Now, there is a constant and irrepressible conflict going on in the mind 
of every intelligent man or woman between the desire to invest their own 
capital so that it may earn them the utmost revenue and the necessity 
of retaining enough of it in ready cash to meet their current necessities. 
This question decided, each for himself, that portion of the total which is 



375 



National M on et ar y Commission 

thus reserved becomes charged with peculiar functions. It is the national 
reserve, and the chief cause of financial disturbances arises from tres- 
passing upon it. 

Is it not evident, Mr. Chairman, that when these reserves are attracted 
by banks and bankers who pay interest for them, they immediately lose 
their peculiar character and become, so far, at once changed from reserves 
into investments, and that their original purpose is greatly reversed? The 
people's ready cash, by the very condition of receiving interest for it, 
necessarily passes through the banker into fixed forms never intended. 
Reserve and investment! Idleness and work! They are adverse and 
irreconcilable conditions. It is true that in the hands of sound commercial 
banks some of these deposit funds may be legitimately used for the best 
interests of society, in the negotiation of business notes representing 
articles of human want and subsistence, passing from production into 
consumption. This is using the fund by promoting the very object for 
which each person originally provided it. But such, we all know, is not 
the tendency nor the operation of the practice now in question. Money 
payable on demand with interest is chiefly loaned here upon fixed property 
intended for permanent investment and upon bonds, stocks, and other 
obligations made for the construction of public enterprises and works of 
established purpose, whose large expenditures are not again resolvable into 
money. They are in their nature fixed, and they demand, not their ready 
cash reserve, but the permanent savings of the people to construct them. 
So that temporary loans of reserved capital upon such securities are certain 
to be called in when they are hardest to pay, because the ready-money 
reserves so injudiciously absorbed by them are called back by their owners 
in apprehension or for the supply of their own needs. 

We all know by experience that those deposits upon which interest is 
paid are the most fugitive and evanescent of all. Those who placed them 
with us well understand their danger. While they receive interest, they 
do so with doubt and suspicion of those who allow it, and with the con- 
sciousness that they themselves are partially compromising principle in 
placing them with those who are willing to pay the price. 

From the very start the vicious practice of paying interest for the custody 
of the people's cash reserves pursues such funds like an enemy from place 
to place and impairs their integrity at every point. And when those 
deposits have at last concentrated in New York banks, the same evil over- 
takes them there, all tending to the reduction of tangible cash assets to the 
lowest point, and to the weakness and impoverishment of the whole country. 
Arrest this practice here, at the termination of the line, and the reform 
will, of necessity, run back through every link of the chain in other cities, 
adding strength to the whole to the incalculable benefit of the nation. 
Every institution that accepts the reserves of the community, agreeing to 
return them upon instant demand, gives a full equivalent in their faithful 



376 



Crises Under National Banking System 

care. It is in duty bound to retain so large proportion of such deposits, in 
actual cash, that no other compensation can be safely allowed. Any such 
payment should be taken at once as a confession that the fund is to be used 
in some manner inconsistent with its real nature and is to be placed more or 
less in peril. Deposits so vmnaturally attracted are necessarily capricious 
and transitory. They fly away at the first whisper of danger, to the 
detriment of the many who have touched them. Those banks which' so 
purchase them are objects of special dread to their colleagues in business, 
while at the same time they are continually held up as patterns of enter- 
prise and as models for imitation. DiiTering so widely from their associates 
in principle and in practice the two can not work harmoniously together, 
nor equally and honorably share the burdens of a national financial system, 
whose stability requires the New York banks voluntarily to stand firmly 
and compactly together as one united body. 

Experience among ourselves has again and again proved that the interest- 
paying banks are the first to become embarrassed by any kind of financial 
disturbance, even if they themselves are not the means of producing it, 
and that they are then almost alone in being compelled to seek protection 
from the loan committee, by a pledge of their securities. 

Will a few members of this association, on the one hand, longer continue 
a practice that subjects them to this humiliation? And is it just, on the 
other, for a large majority to tacitly submit to having their business thus 
drawn away, and the community periodically disturbed by associates whom, 
in the hour of peril, they are compelled for their own protection to support? 

There is no necessity whatever, as there is certainly no profit, for the 
banks in the New York Clearing House, to continue this practice. Public 
safety, business convenience, and social needs all absolutely require the 
service which these banks perform. The commanding position of this 
metropolis will constantly bring to it all the capital that healthful commerce 
and trade can safely employ and any fictitious attractions only tend to 
false estimates of wealth, and betray the community into unprofitable and 
dangerous enterprises. 

If the banks composing this body should unanimously agree to totally 
abolish this practice, the business of each would not seriously diminish, 
because no dealer could secure better terms by changing from one member 
to another, and even if, in the course of time, the disparity between the 
banks in deposits should consequently not continue as great as now, the 
loss by any one in volume would be more than compensated by a gain in 
terms, and by diminished risk, labor, and expenses. 

Taken as a whole, whatever the banks composing this association pay to 
their dealers and correspondents as interest is a totally unnecessary and 
gratuitous payment. It is worse than money thrown away, so far as, and 
because, it tends to divert the current of capital of the country from its 
natural flow. If it be expedient for one member to practice it, it is 



377 



National Monetary Commission 

expedient for all; and then the special and selfish advantage to any single 
one is lost. If it should be continued after our recent experience, it must 
be distinctly recognized as a defect in our financial system, and a standing 
cause of contention and of sharper competition among banks in their pur- 
suit of public favor, which must separate the two classes of institutions into 
known and irreconcilable divisions. 

In the business indirectly done through the New York Clearing House 
there enters another element which it is also proper for us to consider as 
affecting the stability of the whole system. The trust companies and other 
depositories of funds, very much of which are payable on demand and bear 
interest, are receiving the full benefit of this association through the 
medium of one or another of our members, and so they successfully compete 
with us all. They thus secure every facility of exchanging their checks 
with all the banks, and are by that means enabled to divert to themselves 
a large proportion of the current deposits of the city and country, which 
have always been regarded as a special function of banking institutions. 
Instead of being trust companies in the real meaning of the term, many of 
them are banks of deposit, paying interest. This large volume of deposits 
is not only in much greater ratio to capital than are the deposits in banks, 
but it is supported by no special cash reserve of its own whatever. The 
only ready means it has consist in keeping current balances at credit in 
.banks like other dealers. It thus leans upon the same reserve as do the 
banks themselves. If such institutions are to enjoy the privileges of the 
clearing house, they should certainly at least bear the same burdens which 
rest upon its members, and also contribute their full share of the reserve 
funds in cash, by which the stability of the business is maintained. By a 
strange generosity on the part of the Clearing House Association, it enables 
these lively competitors to do their business with the public upon better 
terms than they can do their own, while they do not contribute to the 
public safety. 

Second. Another abuse to which I invite your attention is that of 
receiving and crediting to dealers, as cash in hand, checks drawn upon 
banks out of the city. The aggregate amount of such checks in progress 
of collection by all the members of this body is not less than ten millions, 
and may average fifteen or twenty millions. 

These checks can not be converted into cash here in less time than one 
week, and for that period they remain as dead assets to the banks. How 
did this absurd practice arise? Simply by the eagerness of one bank to 
draw to itself the business of others by superior inducements, an advantage 
which, in the nature of the case, could be but temporary. Others, in self- 
defense, were necessarily compelled to follow the pernicious example, until 
the practice became general. But for this practice this large sum would 
naturally lie as deposits in New York banks from their correspondents 
throughout the country, held here for the purposes of exchange. They 



378 



Crises Under National Banking System 

are not expelled from their natural commercial resting place, and their 
true position is actually reversed. 

Third. There is still another subject of solicitude with which we are all 
daily familiar. I allude to the reception of checks of large amounts, 
drawn upon banks which particularly deal with brokers and operators in 
bonds and stocks. The sums represented in such transactions by the 
nature of the business are of great magnitude. The custom has become 
established of pivoting the operations of the brokers' board through the 
banks by expressing and accounting for their money value in detail, thus 
making it necessary to draw upon banks the immense total that is passed 
from hand to hand. They give rise to checks in sums greatly dispropor- 
tioned to the capital of banks which keep such accounts, and are the occa- 
sion of constant embarrassment to bank officers, who desire to treat their 
associates in the clearing house and their own dealers with generous con- 
fidence, and mean at the same time to avoid extraordinary risks. The 
effort has been partially made to conduct this business by a clearing 
house arrangement where shares, not money or checks, and only balances 
resulting from them are thus paid; and it is the earnest desire of bank 
officers that this effort should be accomplished. I believe that the experi- 
ment, if seriously attempted, can be made successful to the satisfaction of 
brokers, the relief and safety of the banks, and the good of the community. 

The present mode of conducting the transactions of the stock exchange 
adds enormously, and I believe unnecessarily, to the daily volume of busi- 
ness in the clearing house, increases the risks of the exchanges between 
banks, and expresses a false idea of the commerce of the country. 

These, Mr. Chairman, are three most important reforms. Their adop- 
tion will remove all cause of alienation and distrust between the banks 
and members of our fraternity, will unite us together for greater efficiency 
and mutual protection in doing the public business, and will make the 
Clearing House Association a power for good and a tower of strength in the 
nation. 

Our country needs a reliable, ultimate financial resource in time of 
trouble, such as every other commercial nation in the world enjoys. Here 
it may be secured, without the danger which is always apprehended from 
any single colossal institution. Each one acting independently, yet all 
restrained by honorable agreement, the 60 or 70 banks composing this 
association already possess the power to supply, if they will, this long-felt 
defect in the American commercial system; and that, too, not by any 
deliberately formed legal or corporate organization, more complete than 
we now possess, but by the simple voluntary adherence to sound and self- 
evident principles of business, using our freedom to do right. These con- 
siderations must appeal to every man of common justice and common 
sense. I present them to you now in the belief that the peculiar circum- 
stances which have called us together will secure for them the most serious 
attention and cordial assent. 

6158—10 25 379 



National M o n et ar y Commission 

After further discussion, the resolution offered by Mr. 
Coe was unanimously adopted and referred to a committee 
of five members to consider and report to the association. 

The chairman subsequently appointed the following as 
that committee, viz: George S. Coe, president American 
Exchange National Bank; George H. Potts, president 
National Park Bank; O. D. Baldwin, president Fourth 
National Bank; John J. Knox, president National Bank 
of the Republic; R. L. Edwards, president Bank State of 
New York. 



380 



B. — Report of the Committee of the New York 
Clearing House Association." 

The committee appointed by the New York Clearing 
House Association on June 4 "to recommend such re- 
forms in the practices of the associated banks as would 
render their business safer to the public and more equi- 
table to each other," having made report, was increased 
at a subsequent meeting of the association by three new 
members and requested to consider further the whole 
subject. 

At a meeting of the association held on July 29 the fol- 
lowing report was presented : 

That while they substantially concur in the recommendations of the 
committee in its previous report, they have endeavored to remove some 
of the objections made during the discussion, so as to secure what they 
consider very desirable — a cordial and unanimous adoption of these re- 
forms by the whole association. 

The most important and, in fact, the special reform which is essential 
to the efficient and harmonious union and cooperation of the banks in 
one association is the total abolition of the payment of interest upon cur- 
rent deposits. 

This reform has been urged upon the banks from time to time for more 
than twenty-five years and it has always received the most favorable con- 
sideration. Upon two special occasions after violent financial revulsions 
throughout the country, like the present, it was adopted by almost unani- 
mous agreement, and in each instance it failed of becoming a binding 
obligation only by the dissent of two or three members whose active oppo- 
sition was unfortunately permitted to defeat the wishes of the very large 
majority. 

Your committee believe that the careful custody of money held in such 
a manner as to be always responsive to call is itself sufficient compensation 

« Bankers' Magazine, August, 1884, pp. 129-33. 
381 



National Monetary Commission 

to its owners and depositors, and that banks which carry their full propor- 
tion of the reserve cash of the nation and at the same time preserve their 
assets in legitimate commercial securities render a just equivalent and 
furnish a perfect guarantee for the trust committed to their care; and 
that any further consideration or compensation than this must be given 
either at the expense of the needful reserve or of the safety of the invest- 
ments. The proportion of cash to deposits, which from long experience 
conservative institutions in national commercial centers find it expe- 
dient to hold, is at least from one-quarter to one-third the amount. It 
must be evident that at the average rate of interest this ratio can not be 
maintained by any bank where compensation is given for its deposits. 

The responsible duty of holding and maintaining the ultimate cash 
reserve of this great nation is especially imposed upon the associated 
banks in New York, and from doing its full part of this imperative duty 
no one can honorably escape. They are all so inextricably bound to- 
gether by the daily transfer of portions of the nation's deposits from one 
bank to another, by the difficulty of recovering checks upon defaulting 
members after they pass through the clearing house, by the universal 
distrust which one failing institution casts upon its associates, and by 
the urgent demand made upon the stronger in time of trouble to combine 
their resources for the protection of the weaker to avert public disaster, that 
an identity of interest is created by the very existence and necessities of this 
association. This organization can therefore no longer be regarded as a 
simple place of meeting of bank officers, without responsibility for and 
utterly independent of and indifferent to each other's welfare and habits 
of business. These banks, as custodians of an interchangeable public trust, 
have practically and within certain limits become a federative community, 
with mutual responsibilities and obligations, and it is no less the privilege 
than the duty of the members to conduct their own business and to scru- 
tinize the practices of others with a view to the stability of this associa- 
tion and the welfare of the nation. 

This view of the mutual relation of members was fully recognized in the 
recent action of the association, when they took possession of one of the 
largest institutions and discharged its liabilities to the public of some eight 
millions of dollars, and when they further agreed to participate in any loss 
by the issue of loan certificates to that and to other banks; and also when 
they so changed the constitution as to permit official visitation and exam- 
ination into the condition of members, and gave power to demand 
security for their exchanges. 

Powers so great and so important as these, which have been exercised and 
concurred in by every member, are sufficient to show that this association 
no longer regards itself as a simple meeting place for the exchange of papers, 
without further responsibility, but that it has become an institution of 
national significance and value, competent to consider any question vital 
to its own interests. 



382 



Crises Under National Banking System 

If the association can thus promptly meet the necessities of a great finan- 
cial crisis, it may certainly venture to urge upon its members the importance 
of such reform in their modes of business as they believe will tend to prevent 
such a crisis, and will enable them the better to meet one if it come. 

Although this has been the practical experience of the New York Clear- 
ing House Association, and although in every great emergency since its 
organisation it has proved itself possessed of vast capacity to benefit the 
country and protect its own members, yet it must ever be kept in mind 
that this is simply a voluntary association, subject to dissolution by a vote 
of the majority, and subject also to the withdrawal of members at their own 
pleasure. From the nature of the business, no bank, however prosperous, is 
so independent of all circumstances that it may not on some special occasion 
find it convenient to seek the aid or the consideration of its colleagues. A 
solemn obligation, therefore, rests upon everyone to concede something to 
the common good. If the measure now proposed should, upon trial, prove 
erroneous, it may be revoked as readily as it is adopted. 

With the rapid growth of this nation it is more and more important that 
this commercial depository be always kept specially strong in cash reserves, 
and be prepared to meet any sudden exigency that may arise within our 
vast domain. When the intention to do this is distinctly declared by the 
associated banks, by their abolishing the payment of interest upon deposits 
and by thus removing a great cause of weakness and of alienation among 
them, your committee believe that capital will be attracted to this city and 
to this associated body as a place of special security. Thus it has proved 
with those members who have tried it. If a small proportion of the depos- 
its hitherto secured by purchase be consequently drawn away to other 
institutions within this city, or to other places without it, that which 
remains will be more permanent and reliable, and will be sufficient to make 
our business safer and more profitable than before. 

If it result in the retention of a larger cash reserve by interior banks, 
or in the withdrawal of those funds which are particularly subject to alarm 
and which betray the depositaries into questionable temporary loans, it 
can be no cause of regret to the banks nor to the nation. 

The present occasion seems to your committee most opportune for this 
reform. The subject has been ripening in this association for more than 
a quarter of the century. The business of the nation requires the financial 
support which this united and compact body can give it, and the experi- 
ment, if it be an experiment, ought now to be fairly and honorably tried. 

To their special and important recommendation of ceasing to pay inter- 
ests upon deposits your committee have added but one more, viz: 

That of confining the use of the clearing house exclusively to its own 
members. 

Hitherto the practice of permitting exchanges through members of the 
association of checks drawn upon parties not members has freely given every 
facility enjoyed by those who carry the burthens of the banking business 
to those who do not, and who neither fairly participate it its expense nor 

383 



National Monetary Commission 

in its responsibilities. Such parties, therefore, possess advantages superior 
even to banks who created and who sustain the institution. 

In order effectually to secure the object of strengthening the association 
as proposed in the first recommendation of your committee it is manifestly 
necessary to withhold gratuitous facilities from active outside competitors, 
who would otherwise use our own appointed instrument to subvert the 
object we have in view. If desired every legitimate depository possessed 
of the needed requisites and responsibility may find entrance into the clear- 
ing house subject to the same conditions and restrictions as are imposed 
upon existing members. More than this can not be justly required, and 
less will not afford adequate protection. 

In respect to the subject of receiving upon deposit as cash checks drawn 
upon places out of the city, your committee have thought it inexpedient 
now to make special recommendation, but they suggest that a separate 
and special committee be appointed to investigate this question, and also 
to advise whether an arrangement could not be made through the clearing 
house to secure some safe and prompt clearing of such checks, which will 
accrue to the benefit of all banks in the association. 

Finally, your committee can not disregard the just complaint of the banks 
respecting the large volume of checks which arise from transactions in the 
stock exchange, and which embarrass them in their dealings with each 
other and greatly increase the risks of the clearing house. The committee, 
however, content themselves by the simple expression of the wish generally 
entertained among the banks that some arrangement may be made by the 
parties interested to establish a special clearing house for stocks, so that 
these large checks may be abated. 

With these general remarks your committee present the following sum- 
mary: 

First. That no member of the New York Clearing House Association shall 
pay interest upon or allow compensation for deposits after the ist January, 
1885. 

Second. That to secure uniformity in the business of the banks no checks 
shall pass through the clearing house except those drawn upon members of 
th» association. 

Third. That any infraction of the above rules shall be regarded as a 
forfeiture of membership of the association, subject on complaint of any 
member to investigation by the clearing-house committee, in the manner 
provided in the constitution. 

Fourth. That the association recommend that some mode of settlement 
of transactions at the New York Stock Exchange be adopted, whereby 
the large volume of checks which now pass through the clearing house from 
that business may be diminished or avoided. 

Fifth. If these measures be adopted by the association, that the com- 
mittee recommend the same to clearing houses in Boston, Philadelphia, 
Chicago, and other cities. 



384 



Crises Under National Banking System 

All of which is respectfully submitted by the committee. 

Geo. S. Coe, 
President American Exclmnge National Bank. 
Geo. H. Potts, 
President National Park Bank. 
John Jay Knox, 
President National Bank of the Republic. 
R. L. Edwards, 
President National Bank of the State of New York. 
James T. Woodward, 
President Hanover National Bank. 
F. A. Palmer, 
President National Broadway Bank. 
Wm. L. Jenkins, 
President Bank of America. 

A minority report, dissenting from the above, was as 
follows : 

The undersigned member of the committee appointed June 4, 1884, and 
continued on July 8 with three members added "to inquire if the 
methods of business (in respect especially as to payment of interest on 
deposits and the receiving of checks on out-of-town places as cash) as 
conducted by the several members of this association are uniform, etc.," 
begs leave to report as the result of his individual inquiry: 

First. That the vital principle of the business of banks of deposit and 
discount lies in the gathering together of temporarily idle funds into a 
center where they can be made useful for the common good; that the 
payment of interest and negotiation of exchange, drafts, checks, etc., 
have been among the means employed for this purpose from time almost 
immemorial by all commercial nations and communities; and that the 
methods of business as conducted by the members of this association in 
this respect are substantially uniform, 69 out of 72 banks in this city 
paying interest and all receiving checks on out-of-town places as cash 
for deposit. 

Second. That the infinite mulitplicity and variety of the combinations 
and complications which arise in the transactions of the business of a 
great commercial country and a great commercial city, between banks 
and their correspondents, the intimate confidential personal relations 
between banks and their individual customers, make it absolutely neces- 
sary that there should be the utmost possible freedom of action between 
them; that a faithful compliance with our national and state laws will 
secure perfect safety for all. 

Third. That the total abolition of the payment of interest upon or 
allowance of any compensation or consideration in any form, directly 



385 



National M on et ar y Commission 

or indirectly, for deposits, as also the receiving of checks or drafts on other 
cities as cash by an agreement of this association, would be productive 
of great and lasting injury to the city of New York, endangering and 
retarding its commercial prosperity and also to the United States; that 
such an agreement is impracticable, and if made would be found impos- 
sible of enforcement by the association or execution by its individual 
members. 

It is therefore respectfully recommended that the further consideration ' 
by this association of these matters be indefinitely postponed. 

Respectfully submitted. 

O. D. Baldwin, 
President Fourth National Bank. 



Note E. 
Clearing-House Loan Certificates in 1890." 

The effect of a general monetary stringency is felt first 
and most seriously by banks located in the larger of the 
reserve cities. Whenever financial affairs are in a normal 
condition the surplus funds of the local banks find their 
way to the vaults of their correspondent banks located in 
the great centers of business activity. This is undoubtedly 
due in part to the fact that these deposits may be made 
available for lawful money reserve and that a small rate 
of interest is, as a rule, paid upon bank balances by 
associations in the larger cities, and to the further fact 
that the maintenance of a good balance with their city 
correspondents strengthens the claim of the interior banks 
upon the former for rediscounts when the temporary con- 
dition of redundancy passes away and the increased 
demand for money is greater than the interior banks from 
their resources can conveniently supply. 

Thus it results that the wants of a continent in case of 
general depression are at last brought through various 
channels of business activity, by way of withdrawals or 
loans, to the bankers of the great metropolitan cities for 
relief, and they are presented in such a form, in many 
cases, as to preclude the possibility of refusal, if general 
bankruptcy is to be avoided. 

During the period of the stringency above discussed the 
cities of New York, Philadelphia, and Boston were sub- 
jected to the most pressing demands, and after very care- 

o Report of the Comptroller of the Currency, 1891, pp. 12-15. 

38.7 



National Monetary Commission 

ful consideration it was decided by the associated banks 
that the exigency made necessary a resort to the issuing of 
clearing-house loan certificates for the purpose of settling 
clearing-house balances. This expedient had been suc- 
cessfully resorted to during the panics of 1873 and 1884. 

At a meeting of the New York Clearing House Associa- 
tion on the nth day of November, 1890, the following 
resolution was unanimously adopted: 

Resolved, That a committee of five be appointed by the chair, of which 
the chairman shall be one, to receive from banks members of the associa- 
tion bills receivable and other securities, to be approved by said committee, 
who shall be authorized to issue therefor, to such depositing banks, loan 
certificates bearing interest at 6 per cent per annum, and in addition 
thereto a commission of one-quarter of i cent for every thirty days such 
certificates shall remain unpaid, and such loan certificates shall not be 
in excess of 75 per cent of the market value of the securities or bills re- 
ceivable so deposited, and such certificates shall be received and paid in 
settlement of balances at the clearing house. 

Under this resolution a committee of five was appointed, 

and they proceeded, upon deposit of proper securities, to 

issue to applying banks loan certificates in the following 

form : 

No. — .] [$20,000. 

Loan Committee op the 
New York Clearing House Association, 

New York, , i8go. 

This certifies that the has deposited with 

this committee securities in accordance with the proceedings of a meeting 
of the association held November 11, 1890, upon which this certificate is 
issued. This certificate will be received in payment of balances at the 
clearing house for the sum of twenty thousand dollars from any member 
of the Clearing House Association. 

On the surrender of this certificate by the depositing bank above named 
the committee will indorse the amount as a payment on the obligation of 
said bank held by them and surrender a proportionate share of the col- 
lateral securities held therefor. 

($20,000.) , 



Committee. 
388 



Crises Under National Banking System 

These certificates were, by unanimous agreement upon 
the part of the clearing-house banks, accepted in Heu 
of money in the settlement of clearing-house balances. 

In order to provide for the retirement of these securi- 
ties in case the collaterals pledged were found insufficient, 
the several boards of directors of the associated banks 
were requested to, and did, pass a resolution in the fol- 
lowing form: 

Resolved, That any loss resulting from the issue of loan certificates shall 
be borne by the banks comprising the Clearing House Association pro 
rata of capital and surplus, ahd this resolution shall be ratified by the 
boards of the respective banks members of the association, and a certified 
copy of such consent delivered to the chairman of the loan committee. 

This committee, acting under the authority granted 
by the above resolution, issued to the associated banks 
loan certificates aggregating $16,645,000. The first issue 
was made November 12, 1890, and the entire issue was 
retired on February 7, 1891. The largest amount out- 
standing at any one time was $15,205,000, on the 13th 
of December, 1890. 

On the 17th of November, 1890, similar proceedings 
were had by the Boston Clearing House Association. 
On that day, at a meeting of the association, the follow- 
ing resolution was unanimously adopted: 

Resolved, That a committee of five be appointed by the chair, of which 
committee the chairman shall also be a member, to receive from banks 
members of the association bills receivable and other securities, to be 
approved by said committee, who shall be authorized to issue therefor, 
to such depositing banks, loan certificates bearing interest at 7.3 per cent 
per annum, and such loan certificates shall not be in excess of 75 per cent 
of the market value of the securities or bills receivable so deposited, and 
such certificates shall be received and paid in settlement of balances at the 
clearing house. 



389 



National Monetary Commission 

It is observed also that the ultimate payment of the 
certificates, in case the pledged collaterals proved to be 
insufficient, was provided for through the ratification, 
by the boards of directors of the respective banks, of the 
following resolution passed by the Boston Clearing House 
Association at the meeting above noted: 

Resolved, That any loss arising from the issue of loan certificates shall 
be borne by the banks comprising the Clearing House Association pro 
rata, according to the average daily amount which each bank shall have 
sent to the clearing house during the preceding year. It was also voted 
that this resolution shall be ratified by the boards of directors of the 
respective banks members of the association, and a certified copy of such 
consent delivered to the chairman of the loan committee. 

When a bank applied for and received loan certificates 
it was required to deposit the necessary securities and 
to also execute and deliver an obhgation, of which the 
following is a copy: 

The Bank has this day received of , loan 

committee of the Boston Clearing House Association, loan certificates 
issued by said committee in pursuance of a vote of said association, passed 

November 17, 1890, to the amount of thousand dollars, and has 

deposited with said committee the securities a statement whereof is hereto 

annexed; and said Bank receives said loan certificates 

on the terms set forth in said vote, and agrees to pay the amount of said 
certificates, with interest thereon, as provided in said vote. 

Under the operation of the resolution of authority 
granted by the clearing-house committee, as above noted, 
loan certificates were first issued on November 19, 1890, 
and the last were issued on December 6, 1890. On the 
latter date the issue reached its maximum of $5,065,000. 
The last of the issue was retired on January 6, 1891. 

The Clearing House Association of Philadelphia took 
action on November 18, 1890, at which time, at a meet- 
ing of the Clearing House Association, the following 
resolution was adopted: 

390 



Crises Under National Banking System 

Resolved, That, in accordance with resolution of September 24, 1873, as 
amended October 18, 1873, the clearing-house committee will issue loan 
certificates to banks applying, and receive them in payment of balances. 

The resolution of September 24, 1873, as amended 
October 18, 1873, reads as follows: 

For the purpose of enabling the banks, members of the Philadelphia 
Clearing House Association, to afford proper assistance to the mercantile 
and manufacturing community, and also to facilitate the interbank set- 
tlements resulting from their daily exchanges, we, the undersigned, do 
bind ourselves by the following agreement on the part of our respective 
banks, viz: 

First. That the clearing-house committee be, and they are hereby, 
authorized to issue to any bank member of the association loan certificates 
bearing 6 per cent interest on the deposits of bills receivable and other 
securities to such an amount and to such percentage thereof as may in 
their judgment be advisable. 

These certificates may be used in settlement of balances at the clearing 
house, and they shall be received by creditor banks in the same propor- 
tion as they bear to the aggregate amount of the debtor balances paid 
at the clearing house. The interest that may accrue upon these certifi- 
cates shall be apportioned monthly among the banks which shall have 
held them during that time. 

Second. The securities deposited with the said committee shall be held 
by them as a special deposit, pledged for the redemption of the certifi- 
cates issued thereupon, the same being accepted by the committee as 
collateral security, with the express condition that neither the Clearing 
House Association, the clearing-house committee, nor any member thereof 
shall be responsible for any loss on said collaterals arising from failure to 
make demand and protest, or from any other neglect or omission, other 
than the refusal to take some reasonable step which the said depositing 
bank may have previously required in writing. 

Third. On the surrender of such certificates, or any of them, by the 
depositing bank, the committee will indorse the amount as a payment on 
the obligation of said bank held by them, and will surrender a proportionate 
amount of securities, except in case of default of the bank, in any of its 
transactions through the clearing house; in which case the securities will 
be applied by the committee, first, to the payment of outstanding certifi- 
cates, with interest; next, to the liquidation of any indebtedness of such 
bank to the other banks, members of the Clearing House Association. 

Fourth. The committee shall be authorized to exchange any portion 
of said securities for others, to be approved by them, and shall have power 
to demand additional security, at their own discretion. 

Fifth. That the clearing-house committee be authorized to carry into 
full effect this agreement, with power to establish such rules and regula- 

391 



National M on et ar y Commission 

tions for the practical working thereof as they may deem necessary; and 
any loss caused by the nonpayment of loan certificates shall be assessed 
by the committee upon all the banks in the ratio of capital. 

Sixth. The expenses incurred in carrying out this agreement shall be 
assessed upon the banks in equal proportion to their respective capital. 

Seventh. That the clearing-house committee be, and they are hereby, 
authorized to terminate this agreement upon giving thirty days' notice 
thereof at any stated meeting of the Clearing House Association. 

Philadelphia, November i8, 1890. 

At a meeting of the clearing-house committee, held this day, it was, on 
motion — 

Resolved, That in accordance with resolutions of September 24, 1873, as 
amended October 18, 1873, the clearing-house committee will issue loan 
certificates to banks applying, and receive them in payment of balances. 

It will be observed that the original agreement under 
which the committee proceeded in this case was adopted 
during the panic of 1873, and after that subsided no 
further action was had under it until November, 1890, 
but the machinery was kept standing during the whole 
intervening period, ready for immediate use whenever 
required. 

The clearing-house committee having, by the agree- 
ment aforesaid, been authorized to issue loan certificates, 
resolved, on November 5, 1890, to exercise this power, 
whereupon the banks desiring to take out loan certifi- 
cates were required to adopt a resolution empowering 
the hypothecation of securities, under which the issue of 
loan certificates, signed by not less than three members 
of the committee, was commenced on November 19, 
1890, and ceased on May 22, 1891, the total issue being 
$9,655,000. The maximum issue, $8,870,000, was reached 
on January 9. The certificates have all been retired ex- 
cepting $170,000 issued to the Keystone and Spring 
Garden national banks. 



392 



Note F. 
The Treasury and the Money Market in 1890.'* 

During this period [the fiscal year 1890] the Secretary 
was able to purchase United States bonds at constantly 
decreasing prices, so that at the end of the fiscal year 1890 
the Government was paying for 4 per cent bonds 7 per 
cent less than at the beginning of that period, and for 4^^ 
per cent bonds 4>^ per cent less ; but the diminished supply 
of bonds held for sale, together with the lower prices being 
paid, had been gradually curtailing the government pur- 
chases, and soon after the beginning of the present fiscal 
year the growing surplus and the prospective needs of the 
country made it advisable that steps be taken to obtain 
more free offerings of bonds to the Government. 

Accordingly, on July 19, 1890, a circular was published 
rescinding that under which purchases had been made 
since April 17, 1888, and inviting new proposals, to be 
considered July 24, for the sale of the two classes of bonds 
before mentioned. Under this circular there were offered 
on the day prescribed $6,408,350 4 per cents and $594,550 
4>^ per cents, at prices varying from 121.763 to 128.263 for 
fours, and from io33<( to 104.40 for four and one-half s, of 
which there were purchased all the 4 per cents offered at 
124, or less, amounting to $6,381,350, and all the four 
and one-half s offered at 103^, or less, amounting to 
$584,550. As the amount obtained on this day was less 

o Report of the Secretary of the Treasury, 1890. Pages XXVIII to 
XXXII. 

393 



National Monetary Commission 

than the Government desired to purchase, the provisions 
of the circular were extended, with the result that further 
purchases were made, amounting in the aggregate to 
$9,652,500 fours and $706,450 4>^ per cents. 

It was soon apparent that these purchases were inade- 
quate to meet existing conditions; therefore, on August 19, 
the department gave notice that 4^ per cent bonds would 
be redeemed with interest to and including May 31, 1891; 
and two days later the circular of August 21 was pub- 
lished, inviting the surrender for redemption of 20,000,000 
of those bonds upon condition of the prepayment after 
September i, 1890, of all the interest to and including 
August 31, 1 89 1, on the bonds so surrendered. Under 
this circular there were redeemed $20,060,700 4^;^ per cents. 

Notwithstanding the disbursements resulting from pur- 
chases and redemptions of bonds under the circulars of 
July 19 and August 21, the industrial and commercial in- 
terests of the country required that large additional 
amounts should be at once returned to the channels of 
trade. Accordingly, a circular was published August 30, 
1890, inviting the surrender of an additional $20,000,000 
of 4>^ per cents upon the same terms as before. This was 
followed by another, dated September 6, inviting holders 
of the 4 per cent bonds to accept prepayment of interest 
on those bonds to July i, 1891, a privilege which was 
subsequently extended to the holders of currency sixes. 
Under this circular of August 30 there were redeemed 
$18,678,100 4>2 per cent bonds, and under that of Sep- 
tember 6 there was prepaid on the 4 per cent bonds and 
currency sixes interest amounting to $12,009,951.50. 



394 



Crises Under National Banking System 

These prepayments of interest are expressly authorized 
by section 3699 of the Revised Statutes. They were 
deemed expedient because of the disposition of the 
holders of bonds to demand exorbitant prices for them. 

The amount of public money set free within seventy- 
five days by these several disbursements was nearly 
$76,660,000, and the net gain to circulation was not less 
than $45,000,000, yet the financial conditions made 
further prompt disbursements imperatively necessary. 
A circular was therefore published September 13, 1890, 
inviting proposals, to be considered on the 17th, for the 
sale to the Government of $16,000,000 of 4 per cent 
bonds. The offerings under this circular amounted to 
$35,514,900, of which $17,071,150 were offered at 1262^, or 
less, and were accepted. 

The total disbursements since June 30, 1890, by the 
means above set forth, are recapitulated as follows: 



Under circular of — 

April 17. 1888 

July 19, 1890 

August 19, 1890 

August 21, 1890 

August 30, 1S90 

September 6, 1890-. 
September 13, 1890. 

Total 



Bonds redeemed. 



$2, 133, 350. 00 

17, 324, 850. 00 
560. 050. 00 

20, 060, 700. 00 

18, 678, 100. 00 

(a) 
17, 071, 150. 00 

75, 828, 200. 00 



Disbursement. 



$2,358,884.00 
21, 225, 989. 46 

581, 138. 13 

20, 964. 868. 4a 
19, S18, 176.83 
12,009, 951- SO 
21,617,673. 77 



276, 682. 10 



<! Prepayment of interest. 



Another circular inviting the surrender of 4>^ per cent 
bonds for redemption, with interest to and including 
August 31, 1891, was published October 9, 1890. The 



6158 — 10 26 



395 



National M on et ar y Commission 

amount surrendered under that circular during the month 
of October was $3,203,100. 

The total amount of 4 and 4>^ per cent bonds purchased 
and redeemed since March 4, is $211,832,450, and the 
amount expended therefor is $246,620,741.72. The re- 
duction in the annual interest charge by reason of these 
transactions is $8,967,609.75, and the total saving of 
interest is $51,576,706.01. 

It will be seen from the above statement that during 
the three and one-third months, from July 19 to Novem- 
ber I, 1890, over $99,000,000 were disbursed in payment 
for bonds and interest. 

There are many grave objections to the accumulation of 
a large surplus in the Treasury, and especially to the 
power which the control of such surplus gives to the 
Secretary. I am sure these objections appeal to no one 
with so much force as to the head of the Department, upon 
whom rests the difficult and delicate responsibility of its 
administration . 

In my judgment, the gravest defect in our present 
financial system is its lack of elasticity. The national 
banking system supplied this defect to some extent by the 
authority which the banks have to increase their circula- 
tion in times of stringency and to reduce when money 
becomes redundant; but, by reason of the high price of 
bonds, this authority has ceased to be of much practical 
value. 

The demand for money in this country is so irregular 
that an amount of circulation which will be ample during 
ten months of the year will frequently prove so deficient 



396 



Crises Under National Banking System 

during the other two months as to cause stringency and 
commercial disaster. Such stringency may occur without 
any speculative manipulations of money, though, unfor- 
tunately, it is often intensified by such manipulations. 
The crops of the country have reached proportions so 
immense that their movement to market in August and 
September annually causes a dangerous absorption of 
money. The lack of a sufficient supply to meet the in- 
creased demand during those months may entail heavy 
losses upon the agricultural as well as upon other business 
interests. Though financial stringency may occur at any 
time, and from many causes, yet nearly all of the great 
commercial crises in our history have occurred during the 
months named, and unless some provision be made to 
meet such contingencies in the future, like disasters may 
be confidently expected. 

I am aware that the theory obtains in the minds of 
many people that if there were no surplus in the Treasury 
a sufficient amount of money would be in circulation, and 
hence no stringency would occur. The fact is, however, 
that such stringency has seldom been produced by Treas- 
ury absorption, but generally by some sudden or unusual 
demand for money entirely independent of Treasury con- 
ditions and operations. The financial pressure in Septem- 
ber last, which at one time assumed a threatening charac- 
ter, illustrates the truth of this statement. There was at 
that time no accumulation of money in the Treasury from 
customs or internal-revenue taxes, nor from any other 
source that could have affected the money market. On 
the contrary, the total disbursements for all purposes, 



397 



National Monetary Commission 

including bond purchases and interest prepayments, dur- 
ing the last preceding fifty-three days had been about 
$29,000,000 in excess of the receipts from all sources. 

The total apparent surplus on September 10, when the 
money stringency culminated, was $99,509,220.53. Of 
this amount $24,216,804.96 was on deposit in the banks, 
and presumably in circulation among the people, and 
$21,709,379.77 was fractional silver, which had been in 
the Treasury vaults for several years, and was not avail- 
able for any considerable disbursements. Deducting the 
sums of these two items, viz, $45,926,184.73, left an actual 
available surplus of only $53,583,035.80. The amount of 
the bank-note redemption fund then in the Treasury, 
which had been transferred to the available funds by the 
act of July 14, 1890, was $54,000,000, being substantially 
the amount of the available surplus on September 10, 1890. 
This bank-note fund had been in the Treasury in varying 
amounts for many years. In August, 1887, it was 
$105,873,095.60, which had been gradually reduced by 
disbursements to the amount above named. It is appar- 
ent, therefore, that the financial stringency under discus- 
sion was not produced by the absorption of money by the 
Treasury, but by causes wholly outside of Treasury opera- 
tions. At the time when the financial pressure in Sep- 
tember reached its climax the extraordinary disburse- 
ments for bond purchases had substantially exhausted the 
entire ordinary Treasury accumulations, and but for the 
fact that Congress had wisely transferred the bank-note 
redemption fund to the available cash there would have 
been no money at command in the Treasury by which the 



398 



Crises Under National Banking System 

strained financial conditions could have been relieved and 
threatened panic and disaster averted. Had this fund 
been in the banks instead of the Treasury the business of 
the country would have been adjusted to the increased 
supply, and when the strain came it would have been 
impossible for the banks to meet it. The Government 
could not have withdrawn it from the banks without com- 
pelling a contraction of their loans and thus diminishing 
their abihty to give relief to their customers. 

The more recent financial stringency in November, 
immediately after the disbursement of over $100,000,000 
for the purchase and redemption of bonds within the 
preceding four months, furnishes another forcible illustra- 
tion that such stringencies are due to other causes than 
Treasury operations. 



399 



Note (j. 
Bank Faii^ures and Suspensions in 1893.'^ 

It does not seem essential, nor would it be possible, to 
enter into a minute statement of all the circumstances 
attendant upon the closing of the banks during the past 
year. It is sufficient to say that the cause which brought 
about the large proportion of such suspensions was the 
action of depositors who, becoming doubtful of the sol- 
vency of the banking institutions of the country, with- 
drew their deposits. The result was that many banks, 
after paying out on the one hand all the money in their 
vaults and failing to collect their loans on the other, sus- 
pended and passed into the hands of the Comptroller. 
With a full knowledge of the general solvency of these 
institutions and the cause which brought about their sus- 
pension, the policy was inagurated of giving all banks, 
which, under ordinary circumstances would not have closed 
and whose management had been honest, an opportunity 
to resume business. This policy was one which seemed to 
commend itself to the Comptroller as proper to pursue 
under the circumstances, and it is believed the results 
have justified the experiment of its adoption. 

In no instance has any bank been permitted to resume 
on money borrowed or for which as an association it has 
become liable. Whenever those active in the management 
of the banks resuming, either as executive officers or 
directors, have been debtors to such banks, their indebted- 
ness has been paid or secured, and whenever impairment 

o Report of the Comptroller of the Currency, 1893, p. 10-12. 
400 



Crises Under National Banking System 

of capital stock has been found, such impairment has 
been made good, either by voluntary or enforced assess- 
ment on the shareholders. In a number of instances 
changes have been made in the directory and official corps 
of resuming banks. The criticism to be made on the 
management of these banks was the improper distribution 
of their loans, a circumstance which greatly retarded the 
conversion of such loans into money at a time when it was 
needed to avoid suspension. 

Of the banks which failed to resume many had long 
been under the continual criticism of this Bureau for 
violations of law and imprudent methods of banking, and 
the closing of them was only hastened by the general con- 
dition of financial affairs. Some failed because of criminal 
acts on the part of the officials in charge and others because 
of a lack of proper appreciation of the purposes of a bank. 

An analysis of the suspensions and failures which 
occurred showed that during the year 158 banking asso- 
ciations, as heretofore stated, were compelled to suspend 
business, being 4.09 per cent of the number of existing 
associations. Their capital stock aggregated $30,350,000, 
or approximately 4.3 per cent of the paid-in capital stock 
of all the banks in the system. 

Of the banks which suspended 65, or 41.14 per cent, 
with a total capital stock of $10,935,000, were insolvent, 
and required the appointment of receivers; 86, or 54.43 
per cent, with a capital stock aggregating $18,205,000, 
were able to resume business, and 7, or 4.43 per cent, 
with a capital stock of $1,210,000, were placed in charge 
of examiners in the expectation of resumption. Of the sus- 



401 



National M o n et a r y Commission 

pended banks 2 were located in the New England States, 
both in New Hampshire, with a total capital stock of 
$250,000, for each of which a receiver was appointed. 

In the Middle States there were 3 suspensions — 
2 in New York, with a total capital stock of $500,000, 
and I in Pennsylvania, with a capital stock of $50,000. 
Those in New York were placed in the hands of receivers, 
and the i in Pennsylvania in charge of an examiner 
pending proposed resumption. 

There were 38 suspensions in the Southern States, the 
capital stock involved aggregating $8,815,000. Of these 
19, with a total capital stock of $5,630,000, resumed 
business, and the same number, with a total capital stock 
of $3,185,000, failed. In this geographical division 
Texas furnished the greatest number of suspensions, 
namely, 12, with a total capital stock of $1,480,000, of 
which 6, with a total capital stock of $430,000, resumed 
business, and the remainder, capitalized to the amount 
of $1,050,000, failed. There were 6 suspensions in Ken- 
tucky and the same number in Tennessee. The total 
capital stock of those in Kentucky was $2,300,000 and 
of those in Tennessee $2,750,000. In Kentucky all the 
banks that suspended, except one, with a capital stock 
of $50,000, were permitted to resume business. Two of 
the banks in Tennessee, with a total capital stock of 
$2,000,000, resumed business and 4 were placed in the 
hands of receivers. Four banks in Georgia suspended 
and the same number in Alabama, with a total capital 
stock of $675,000 and $550,000, respectively. Of these, 
I bank in Georgia, with a capital stock of $250,000, and 



402 



Crises Under National Banking System 

3 in Alabama, with a total capital stock of $400,000, 
resumed business. Two banks in North Carolina sus- 
pended, with a total capital stock of $300,000, both of 
which were able to resume business, but the 2 which sus- 
pended in Florida, with a total capital stock of $200,000, 
required the appointment of receivers, as did also the i in 
Mississippi, which had a capital stock of $60,000, and 
the one in Arkansas, with a capital stock of $500,000. 

The Western States furnished 49 suspensions, with an 
aggregate capital stock of $10,250,000. Of these, 31 re- 
sumed business, 17 failed, and i was placed in charge of 
an examiner pending resumption or the appointment of 
a receiver. The capital stock of the banks which re- 
sumed aggregated $6,275,000, and of those which failed 
$3,750,000. The greatest number of suspensions which 
occurred in this section was in Kansas, namely, 8, al- 
though the capital stock involved — $880,000 — was less 
than that of the banks in four other States. Four of the 
banks in Kansas, with a total capital stock of $480,000, 
resumed, and 3, with a capital stock of $300,000, 
failed. Of the 7 banks in Indiana which suspended, 4, 
with a total capital stock of $450,000, resumed, and 3, 
with a total capital stock of $550,000, were placed in the 
hands of receivers. In Iowa 6 banks suspended, with a 
total capital stock of $575,000, of which number but i 
failed, with a capital stock of $50,000. The same num- 
ber of banks in Nebraska suspended, 3 of which, with 
a total capital stock of $350,000, resumed business, and 
receivers were appointed for the remaining 3, the total 
capital stock of which was $450,000. Five banks sus- 



403 



National Monetary Commission 

pended in Wisconsin, with a total capital stock of $625,000, 
all of which resumed business, while in Illinois there were 
4 suspensions, with a capital stock aggregating $2,150,000. 
All of these were placed in the hands of receivers. In 
Missouri 3 banks suspended, with a total capital stock 
of $1,300,000, all of which resumed. In Michigan there 
were the same number of suspensions as in Missouri, but 
the capital stock involved aggregated only $215,000. 
But I of these banks resumed, the capital stock of which 
was $65,000. The fewest suspensions which occurred in 
any State in this division was in Ohio, there being but 2, 
the aggregate capital stock of which was $180,000. One 
of these banks, with a capital stock of $80,000, resumed 
business, and the other failed. 

Sixty-six banks suspended in the Pacific States and 
Territories, being nearly 42 per cent of the total suspen- 
sions which occurred and represent capital stock amount- 
ing to 35 per cent of the total capital involved. Of these, 
36 banks, with a capital of $6,300,000, were solvent and 
resumed business; 25, with a capital of $3,250,000, were 
placed in the hands of receivers; and 5, with a total capital 
of $1,060,000, in charge of examiners pending resumption. 
The greatest number of suspensions was in Colorado, 
involving the largest amount of capital stock of suspended 
banks of any State in the Union, the number being 16 
and the capital $3,600,000. All of these banks resumed 
except 2, the capital stock of which was $300,000. The 
second greatest number of suspensions occurred in the 
State of Washington, 14 banks, with an aggregate capital 
stock of $1,735,000. Of this number, 4, with a capital 



404 



Crises Under National Banking System 

stock of $425,000, resumed; 3, with a capital stock of 
$510,000, were placed in charge of examiners pending 
resumption; and 7 failed. The suspensions in Montana 
numbered 10, and their capital stock amounted to 
$1,875,000. Of these, 2, with a capital stock of $300,000, 
resumed, and 7, with a capital stock of $1,075,000, were 
placed in charge of receivers. Six suspensions occurred 
in Oregon, and the same number in California, the aggre- 
gate capital stock represented being $800,000 and 
$1,200,000, respectively. There was but one failure in 
each State, the capital stock in the case of the Oregon 
bank being $100,000 and that of the California bank 
being $250,000. There were 3 suspensions in Utah, 
3 in North Dakota, and 3 in South Dakota. The 3 
banks in Utah, with a capital stock aggregating $250,000, 
resumed business, while the 3 in North Dakota, with a total 
capital stock of $400,000, failed. Two of the banks in 
South Dakota, with a total capital stock of $100,000, were 
placed in the hands of receivers, and i, with a capital 
stock of $125,000, resumed. Two suspensions occurred 
in Wyoming, and the same number in New Mexico. One 
bank in Wyoming, with a capital stock of $200,000, 
resumed, and i, the capital stock of which was $50,000, 
failed. Of the banks in New Mexico, i, with a capital 
stock of $175,000, failed, and the other, with a capital 
stock of $50,000, was placed in the hands of an examiner 
pending resumption on the appointment of a receiver. 
The only other suspension in this geographical division 
occurred in Oklahoma, being that of a bank with a capital 
stock of $50,000, which, being solvent, resumed. 



405 



Note H. 
A. — CivEARiNG House Loan Certificates in 1893." 

The unprecedented condition of the money market from 
June to September called for extraordinary remedies, not 
only to avert general disaster to the banks, but to prevent 
commercial ruin. This remedy was the issuing of clearing 
house loan certificates, which were brought into use, as in 
1873, 1884, 1890 to 1 89 1, by the associated banks of New 
York, Boston, Philadelphia, Baltimore, and other cities 
where needed. The service rendered by them was inval- 
uable, and to their timely issuance by the associated banks 
of the cities named is due the fact that the year's records 
of suspensions and failures is not greatly augmented. 

The form of these certificates, with the conditions under 
which they were issued in 1890-91 (the form and con- 
ditions being the same during the late issuance of them 
as then) , is described at length in the Comptroller's Annual 
Report for 1891.^ The subject is alluded to again only 
because it constitutes a very important part of the year's 
banking history, and for the additional reason that here 
and there are to be found those who entertain an entirely 
erroneous idea of the purpose for which these certificates 
were issued and what was accomplished by their issuance. 
Briefly stated, they were temporary loans made by the 
banks associated together as clearing-house associations, 
to the members of such association, and were available to 

« Report of the Comptroller of the Currency, 1893, pp. 15-16. 
b See Appendix, Note E, p. 388. 

406 



Crises Under National Banking System 

such banks only for the purpose of setthng balances due 
from and to each other, these balances under normal con- 
ditions of business being always settled in coin or cur- 
rency. Each clearing-house association selected a com 
mittee charged with the issuing of the certificates to each 
bank desiring the same, such bank being required before 
receiving them to deposit with the committee its bills 
receivable, or other securities, as collateral for the loan. 
The amount of certificates issued to each bank was limited 
to 75 per cent of the value of the securities deposited. 
They bore interest at rates varying from 6 to 7.3 per cent. 
Immediately upon their surrender to the committee they 
were canceled and the securities held as collateral were 
returned to the bank depositing the same. 

At a time when vast sums of coin and currency were 
being withdrawn from the banks to be hoarded these 
loan certificates, by performing the functions of the cur- 
rency or coin customarily required for settling daily bal- 
ances at the clearing house, released so much currency 
or coin to legitimate and current demands of business 
and unquestionably placed it within the power of the 
banks in the cities named to extend to outside banks the 
aid needed on the one hand and liberally granted on the 
other. In no instance were these certificates designed to, 
nor did they, circulate as money. They were due bills, 
and their sole function consisted in discharging the single 
obligation at the clearing house. An attempt on the part 
of a bank in any of the associations issuing these certifi- 
cates to use them otherwise would have incurred a fine 
and other penalties provided in the rules governing such 
associations. Their issuance at so early a date in the 

407 



National M on et ar y Commission 

financial derangement of the country was most oppor- 
tune in not only preventing an acute panic but intend- 
ing to restore public confidence, such action demonstrating 
that by mutual agreement of all, the weak banks of the 
association would be, so far as depositors and other cred- 
itors were concerned, as strong as the strongest. 

In inaugurating the issuing of certificates so promptly 
and issuing them to so large an amount the clearing- 
house association of New York in particular rendered the 
country great service, and the associated banks of that 
city are entitled to the credit which the public generally 
accords them. 

The following figures, showing the movement and 
amount of the issue of loan certificates in 1893 in the 
cities named, will indicate the measure of relief afforded 
by them: 



New York 


June 


21 


Philadelphia 


June 


16 


Boston 


June 


27 


Baltimore 


--.do. 





Pittsburg 


Aug. 


II 



Total . 



Date of 
issue of 
first cer- 
tifirat". 



Date of largest amount 
outstanding. 



Aug. 29 to Sept. 6- 
Aug. IS 

Aug, 23 to Sept. I- 
Aug. 24 to Sept. 9. 
Sept. IS 



Largest 

amount 

outstanding. 



P30. 2B0, 000 
10, 965 , 000 

1 1 , 445 , 000 

I, 475,000 

987, 000 

63, 152, 000 



Amount out- 
standing 
October 31. 



, 835,000 



84s, 000 
332, 000 



408 



B. — Report of the New York Ci.earing-House Loan 

Committee. 

New York, October 31, i8gs. 
To the New York Clearing House Association: 

The loan committee of 1893 respectfully present the 
following report : 

Early in June of this year, at an informal meeting 
of several banking officers, the subject of the financial 
outlook was discussed, and those present thought the 
situation was sufficiently grave to call for some action 
by the Clearing House Association. 

On the 14th of June a meeting of the clearing-house 
committee was called, at which all the members were 
present. After a protracted discussion it was moved that 
the following be adopted as the opinion of the committee : 

The clearing-house committee think it advisable to call a meeting of 
the Clearing House Association for Thursday, the 15th instant, at 12 
o'clock. The committee will recommend at that meeting an issue of loan 
certificates. 

This was unanimously adopted, and in accordance with 
this action a meeting of the Clearing House Association 
was held Thursday, June 15, at 12 o'clock, 58 banks being 
being represented thereat. 

The President, Mr. Williams, stated that the meeting 
had been called in order that the recommendation of the 
clearing-house committee having reference to the dis- 
turbed financial condition of the country might be pre- 
sented for action by the association. 



409 



National M on et ar y Commission 

Mr. E). H. Perkins, jr., chairman of the clearing-house 
committee, presented the views of that committee, as 
above expressed. 

After a protracted discussion, in which several mem- 
bers of the association participated, the following resolu- 
tion was adopted: 

Resolved, That a committee of five be appointed, with the President, to 
receive from banks, members of the association, bills receivable and other 
securities to be approved by said committee, who shall be authorized to 
issue therefor to such depositing banks loan certificates bearing interest at 
the rate of 6 per cent per annum, and such loan certificates shall not be in 
excess of 75 per cent of the market value of the securities or bills receivable 
so deposited, and such certificates shall be received and paid in settlement 
of balances at the clearing house; and all the rules and regulations hereto- 
fore adopted in the issue of loan certificates shall be in force in the present 
issue. 

The president, Mr. Williams, appointed the following 
gentlemen as the loan committee: Mr. F. D. Tappen, 
Mr. E. H. Perkins, jr., Mr. J. Edwards Simmons, Mr. 
Henry W. Cannon, Mr. William A. Nash, and Mr. George 
G. Williams, president ex officio. 

The loan committee met immediately after the adjourn- 
ment of the , association, June 15, and organized by the 
selection of Mr. Tappen as chairman, and Mr. Nash as 
acting chairman in the absence of Mr. ^pTappen. The form 
of certificate to be used and the necessary blanks were 
adopted, and the manager was requested to have the same 
prepared for use. The first issue of certificates under the 
above resolution, $2,550,000, was made on June 17. The 
first cancellation of certificates, to the amount of $100,000, 
took place on the 6th day oi July. The committee have 
met daily up to the present time, and have held 105 meet- 
ings. The aggregate amount of certificates issued was 



410 



Crises Under National Banking System 

$41,490,000. The greatest amount outstanding was 
$38,280,000, on August 29, and continued at that amount 
until September 6. The amount of collateral received by 
the committee, in a round sum, was $56,000,000, 72 per 
cent, or $40,000,000, being in bills receivable; 28 per cent, 
or $1^,000,000, being in stocks and bonds. The total 
number of pieces deposited with and examined by the 
committee was 11,029. Four thousand and forty-nine 
pieces were also examined as substitutions. 

It has been frequently stated and feared by some that 
the amount of certificates issued during the present crisis 
was in excess of the amount issued, in proportion to the 
deposits held by the banks, during any previous panic. 
On examination of the figures, however, we find that this 
has not been the case, as in 1873 the deposits were 
$152,640,000 and loan certificates $22,410,000, being 
14.7 per cent; in 1884, ^^ deposits of $296,575,300, cer- 
tificates were issued to the amount of $21,885,000, being 
7.3 per cent; in 1890, on deposits of $376,746,500, 
$15,205,000 certificates were issued, being 4 per cent; 
in 1893, $374,010,100 deposits, certificates $38,280,000, 
being 10.2 per cent. The greatest amount of certificates 
in proportion to deposits was issued in 1873. Had the 
same proportion of loan certificates been issued in 1893 
as was issued in 1873 the amount would have reached 
the sum of $55,000,000. 

The percentages of loan certificates used in the pay- 
ment of balance have been as follows: In June, 9 per 
cent; in July, 78 per cent; in August, 95 per cent; in 
September, 30 per cent; in October, nil, being a total of 

6158 — 10 27 411 



National Monetary Commission 

certificates used in the payment of balance $299,273,000. 
The amount of interest paid on certificates has been 
$535,513.33. The expenses of the committee for sta- 
tionery, clerk hire, etc., $562.27. All of this work has 
been accomplished without loss to the association. 

The committee takes this occasion to express • their 
thanks for the courtesy shown by the Chase National 
Bank and the First National Bank in allowing the com- 
mittee to use the vaults in their banks to deposit the 
securities held by the committee, there being no suitable 
accomodations connected with the clearing house for this 
purpose. 

Full and complete statistics of the transactions had 
with each bank by the loan committee will be filed with 
this report. 

Respectfully submitted. 

F. D. TappEn, Chairman, 
B. H. Perkins, Jr., 
J. Edward Simmons, 
Henry W. Cannon, 
W11.UAM A. Nash, 
Geo. G. WiiyiviAMS, Ex-ofjicio. 
WiiyiviAM ShERER, Secretary. 



412 



Note I. 
The Banks and the Panic of 1893.'^ By A. D. Noyes. 

It was on the western banks that the shock of panic 
fell in 1893 with greatest violence. The records of no 
previous panic show in this regard such impressive sec- 
tional contrasts. The list of national and state bank 
failures for 1893 shows for the New England and Middle 
Atlantic States 17 suspensions, with total estimated 
liabilities of $13,138,073. This list includes such finan- 
cial centers as New York, Boston, and Philadelphia. 
On the other hand, the failure of similar institutions in 
the five States of Ohio, Indiana, Illinois, Michigan, and 
Wisconsin numbered 49, with aggregate liabilities of 
$23,163,537. In the II granger and Rocky Mountain 
States, still farther to the west, the state and national 
bank failures reached the yet more disproportionate 
number of 147, and reported liabilities footed up no less 
than $24,781,181.'' Taking the country as a whole, the 
record shows that out of 360 national and state banks 
suspended during 1893, with liabilities of $109,547,556, 
no less than 343 failures, with liabilities of $96,409,483, 
occurred in sections of the Union west or south of Penn- 
sylvania. The failures of private banks and savings 
institutions were distributed in almost exactly the same 
proportion. " 

o This note contains rather more than half of an article by Mr. Noyes 
which appeared in the Political Science Quarterly, March, 1894. 

b Figures compiled and published by Dun's Mercantile Agency. 

c Total failures of such institutions in 1893 were 250; liabilities, 
$41,895,346. Outside of the New England and Middle Atlantic States 
failures were 224; liabilities, $35,543,801. 

413 



National M on et ar y Commission 

For this remarkable disparity there were several rea- 
sons. Rapid development on other than local capital 
had been the chief feature of the West's recent career, 
and this was a double element of weakness. The collapse 
of the "land booms" in 1899 and 1890 had served as a 
wholesome check to speculation, but the two enormous 
grain harvests of 1891 and 1892 had again revived it. 
The warnings of 1890 and of the brief succeeding period 
fell in that section on deaf ears. The evils of a vicious 
currency took root for this reason far more extensively 
west of the Ohio. "Bad loans" made up a startlingly 
large proportion of the assets of bankrupt institutions. 
The East, on the other hand, where foreign capital was 
concentrated, felt much more severely the shock and the 
significance of the London crash of 1890. When, in 1891, 
the expulsion of gold by our accumulated paper currency 
began, it was the eastern banks from whose vaults the 
gold was first withdrawn to meet such export require- 
ments. It was through these banks that the "run" 
began, with 1893, on the Government's gold reserve for 
the redemption of legal-tender notes. It was on the 
eastern stock exchanges that foreign investors poured for 
two years continuously their holdings of American secu- 
rities. These multiplied signs of coming trouble were not 
ignored. The eastern institutions were indeed subjected 
to the same demoralizing pressure from currency over- 
issues, and they furnished their share of reckless ventures 
and dishonest speculation. But the weeding out of such 
concerns was very thorough in 1890 and in the ensuing 
year or two, and, as a rule, the policy of the Eastern city 



414 



Crises Under National Banking System 

banks on the eve of the general breakdown was sound 
and conservative.'^ 

But all this relative conservatism in the eastern banks 
failed to offset the results of a thoroughly dangerous 
practice embodied in our banking system. This is the 
carrying and loaning out, in city banks, of interior banks' 
legal reserves. This account, which Prof. Amasa Walker 
aptly described as the most "explosive" element in 
American banking, arises from the larger opportunity 
offered in great financial centers for the steady use of 
capital. At nearly all times western banks are glad to 
get the 2 per cent allowed for use of their deposits by 
eastern institutions. The national-bank law, moreover, 
permits the so-called "country banks" to deposit with* 
other banks in certain specified cities three-fifths of their 
15 per cent cash reserve. Since the country banks can 
at no time legally lend out this last-named fund, it is 
kept, as might be supposed, perpetually on deposit with 
the reserve city institutions. In recent years this trust 
fund has reached phenomenal proportions. At the close 
of 1892 the national banks reported "due from approved 
reserve agents" the sum of $204,948,159. The total 
amount due from other banks was more than double this. 
In May of 1892 the New York City banks alone held 
$293,078,195 subject to call from other institutions. Let 
it be noted not only that this fund was money belonging 

«The truth of this was illustrated when New York's bubble of specula- 
tion in the "industrial stocks" broke in May. This group of stocks fell 
on the average 25 points within a week, and some of them 40 or 50, but 
no bank suffered. This was, moreover, before the issue of loan certificates. 
As a matter of fact, the banks had long been notoriously shy of these 
securities. 

415 



National Monetary Commission 

to private depositors in other banks, and subject to their 
instant call, but that a large proportion of it was the 
very money prescribed by law to be held for the purpose 
of meeting "runs" by the western banks' own creditors. 
This will explain the violence of the strain on city banks 
when the country institutions all at once took fright. 

Nor were the bad results of the system by any means 
confined to cities whence interior deposits were with- 
drawn. The city depositories kept on hand by law a 
cash reserve of 25 per cent. The country banks held in 
their vaults only the insignificant reserve of 6 per cent. 
Grant, what was generally true, that the city banks were 
conservative in their use of deposited interior reserves 
and invested them as a rule in demand loans on stock or 
bond collateral. A bank in Iowa or Colorado, with its 
three-fifths reserve deposited in New York City, may 
easily enough, when panic threatens, telegraph an imme- 
diate call for the return of such deposits. But actual 
money, even if ready for delivery, can not be shipped 
from New York to Denver in a day, and forty-eight 
hours' delay may easily settle the fate of the west- 
ern institution. This is the reason why so many 
banks throughout the West suspended in last summer's 
crisis, when they were perfectly solvent on their books, 
and indeed resumed payments in a few days' time — as 
soon, in fact, as the money shipped from their reserve 
depository reached them.'^ The whole practice, in a 

o The comptroller reports that out of the total of 158 national bank 
failures, with a capital stock of $30,350,000, 86, with a capital of $18,205,000 
resumed business within a short time. None of the 5 banks which sus- 
pended in the New England and Middle States resumed paj'-ment. Of 



416 



Crises Under National Banking System 

country of such vast distances as ours, is full of continual 
possibilities of mischief. Whether or not a serviceable 
reserve-deposit plan with better safeguards could be 
devised, I shall not here discuss. But it is worth our 
while to note that the Bank of England, the most con- 
spicuous of all depositories of tributary bank funds, 
carries in its entire deposit liabilities a less amount than 
our eastern banks hold from deposits of interior reserves 
alone. In England delay in transferring currency against 
withdrawals by interior banks reaches a minimum. Yet 
the Bank of England habitually holds against its total 
deposits a cash reserve of 40 to 45 per cent, and even 
now Mr. Walter Bagehot's argument is being repeated 
by a score of excited London critics, that the bank, as 
depository for other institutions, is in the nature of a 
public trustee, whose directors must content themselves 
wholly with ultra-conservative investments and with 
profits below the average. 

The facts undoubtedly make it hard to say exactly 
how far the banks as a whole were culpable in this 
inflation process, or how far they were themselves vic- 
tims of outside circumstances. Both conclusions will 
be found in many cases correct. When we discuss, 
however, the conduct and policy of the banks after the 
panic of 1893 had actually begun, we stand on firmer 
ground. Every banking institution has its own peculiar 
responsibility placed upon it in time of panic, but the 

the 6 national banks which suspended in Iowa, all but i subsequently 
resumed. Sixteen national banks suspended in Colorado, of which all but 
2 resumed, and 6, respectively, in Oregon and California, of which in 
each case all but 2 resumed. 



417 



National Monetary Commission 

gravest responsibility by far rests on the great city de- 
positories. * * * 

* * * Xhe reserve cities furnished throughout the 
crisis a memorable exposition of the principles of sound 
panic banking. The time-honored rule, established by 
the "Bullion report" to Parliament in 1810, that in time 
of panics banks should discount freely and fearlessly for 
all solvent customers, was observed in a remarkable 
degree. In New York City in ordinary times the loan 
account often falls far below the deposit total ; '^ it rarely 
exceeds it. Between June 4, 1893, the week when panic 
may be said fairly to have begun, and August 5, which 
may be called the height of actual panic, deposits in the 
64 New York clearing-house banks decreased $58,466,000, 
and actual specie and legal-tender holdings $49,621,800. 
This was a terribly sudden and violent impairment of 
reserves, the actual money decrease being 38 per cent. 
Yet in the face of it, outstanding loans were contracted 
only $7,972,700. This remarkable maintenance of bank 
accommodation to borrowers, in the face of monetary 
crisis, was made possible by two distinct and wise meas- 
ures of policy. The first was a firm and continuous cur- 
tailment of outstanding loans before the panic's actual 
outbreak.^ This was to strengthen cash resources and 
reduce pressing liabilities. The second measure was the 

a In the first week of 1893 New York clearing-house bank loans were 
$441,283,700; deposits, $455,367,800. In the last week of 1893 loans were 
$417,606,900; deposits, $506,437,800. 

& Between the first'week of April and the first week of June loans were 
reduced in New York $16,834,300, although in the same time the total 
cash reserve increased $8,304,700, and the surplus reserve over the re- 
quired 25 percent of net deposits, $10,324,425. 

418 



Crises Under National Banking System 

adoption, when once real panic had begun, of a poHcy 
almost exactly opposite. ° This was the issue of clearing- 
house certificates in order to maintain the loan account. 

I shall not enter into a lengthy discussion of this finan- 
cial contrivance. It is enough to say that the loan cer- 
tificates are a purely American invention, and that their 
safe and satisfactory operation in financial crises^ has 
won for the system the approval of practically all com- 
petent judges. They are, as is generally known, a species 
of currency issued by a clearing-house committee to all 
banks in the association applying for such accommodation 
and furnishing approved and sufficient collateral. These 
certificates are by agreement accepted in payment of 
balances between banks of the clearing house. They 
can not, of course, circulate outside the limits of this 
clearing house, and an annual interest rate of 6 per cent 
charged up daily against the bank in whose name such 
certificates are outstanding insures their early redemption 
when the money market is restored to equilibrium. 

a The banks followed another thoroughly sound principle in lending 
only at high rates, the sufficient reason being that a high rate is a matter 
of no concern to a borrower in real extremity, while a low rate is a tempta- 
tion to unscrupulous borrowers to engage the money and then relend it at 
a rate fixed by the needs of others. The banks were therefore entirely 
right in lending at one-eighth per cent and interest, or 51 per cent yearly, 
the $5,000,000 later obtained through loan certificates and released in 
preparation for gold imports. An effort then to "break" the money 
market by offers at a low rate would have had extremely bad results. So 
in the ensuing week the action of the New York banks in raising the rate 
for interior rediscounts to 12 per cent was fully justified. Both actions 
have ample precedent in the skillful financiering of the Bank of England 
during the Baring crisis of November, 1890. 

b The real origin of the plan was in the action of the New York clearing 
house in 1857, when certificates of credit were issued through the Metro- 
politan Bank to state banks which could not redeem their notes, the notes 
being deposited as security against the certificates. 

419 



National Monetary Commission 

Through the use of this ingenious emergency device 
last summer solvent borrowers were protected by the 
courageous advance of banking credits at the very worst 
hour of panic. Nor were the system's benefits extended 
to individual borrowers alone. Not only did the interior 
banks, at the panic outbreak, call in from city institutions 
a great part of their own deposited reserves, but they 
were clamorous for "rediscounts;" in other words, for the 
purchase from them for cash of paper already discounted 
for their own customers. To this demand, too, which 
came with no impropriety from heavy depositors, the 
larger banks responded. The total of notes and bills 
rediscounted for other institutions rose from $14,021,596 
in March to $18,953,306 in May, and to $29,940,438 in 
July, the height of the summer's panic. In 1873, during 
a corresponding panic period, the account increased only 
from $5,403,043 to $5,987,512. 

The clearing houses of four other cities followed New 
York's example in the issue of loan certificates. Chicago, 
however, where a strong local prejudice exists against the 
plan, refused to follow. In the worst of the August panic 
a resolution authorizing such issues was indeed adopted 
by the Chicago clearing house, but no bank availed itself 
of the opportunity. The result was exactly what might 
have been foreseen. In the eastern cities the use of loan 
certificates so far offset the violent shrinkage in reserves 
that between May 4 and July 12 the loan account of the 
New York national banks actually increased; the loans of 
Philadelphia were cut down only 2 per cent, and those of 
Boston only 4 per cent. But Chicago, lacking the emer- 



420 



Crises Under National Banking System 

gency provision of the eastern clearing houses, was forced 
to reduce its loans no less than 15 per cent.'^ In a city 
where local enterprises were already inflated by specula- 
tion incident to the World's Fair, the result of this con- 
traction was a collapse more violent than that of any 
other large commercial center. * * * 

* * * There was no bank suspension in the reserve 
cities during 1893, except where the strain of panic forced 
public insolvency. This statement needs, however, one 
important qualification, involving discussion of a very 
delicate and unpleasant question. It will be remembered 
by those who watched the course of panic financiering 
that accusations were freely made, as early as July, 
that banks were refusing cash payments to large depos- 
itors. At first the country banks were charged with re- 
fusing to remit their cash collections.'' Banks in some 
larger cities were next accused of withholding similar re- 
mittances. At length it was alleged, in the daily press 
and on the floor of the United States Senate,*^ that New 

o The contraction of loans in Chicago was far more violent in July and 
in August, dates not covered by the national reports. The Chicago banks 
themselves publish no statements except when called for by government 
authorities. 

ft Some novel and curious incidents arose in this connection. The ex- 
press companies did a very large business during the panic in presenting 
out-of-town checks at the banks on which they were drawn and bringing 
the money to the city bank whence the check was remitted. The out-of- 
town banks frequently resisted this by paying in silver dollars or fractional 
coin. Domestic exchange between two great eastern cities was atone time 
fixed by the expfress charges for transporting silver dollars. On August 
30 Chicago exchange on New York sold at $3 premium per $1,000. 

c In the debate on Senator Peffer's resolution of August 22, instructing 
the Comptroller of the Currency to inform the Senate whether certain New 
York banks were or were not violating the national-bank act by refusing 
cash to depositors and by charging exorbitant discount rates. The reso- 
lution was advocated by Senator Hill and opposed by Senators Hoar, 
Gorman, Hawley, and others. 

421 



National Monetary Commission 

York City banks were refusing to redeem checks of their 
own depositors in legal-tender money. This accusation 
was made with bitterness, and it was not denied. The 
popular sentiment was, however, strongly against the 
proposed Senatorial investigation. No bank depositor to 
whom cash payment was refused ever gave public utter- 
ance to complaint. No legal process was invoked. The 
newspaper critics soon found their attack on the banks 
impolitic. The Senate resolution for an inquiry was re- 
ferred to the Finance Committee, where it was smothered, 
as it ought to have been and everyone knew it would be, 
and there can be no doubt that its advocates paid the 
penalty of their aggressiveness in a considerable loss of 
popularity. Thus far, then, it might be argued that pub- 
lic opinion sustained the action of the banks in question. 
From an economic standpoint, however, this by no 
means ends the matter. That some of the New York 
clearing-house banks did thus suspend cash payments is a 
matter of public knowledge. No formal or concerted 
action, indeed, was taken by the banks; the clearing 
house ignored the whole performance; the majority of 
New York institutions continued to pay cash on demand 
to all depositors, and those which did refuse cash pay- 
ments not only offered to such depositors checks on other 
banks, "^ but cashed small checks without inquiry, and 
larger checks when the need was shown to be imperative. 
Nevertheless it was suspension, its effect on business and 

a Most of these banks sent to their customers rubber stamps marked 
"payable through the clearing house." This was to be stamped on checks 
when drawn, by way of a polite and euphemistic hint to receivers of the 
checks that the bank declined to pay cash. 



422 



Crises Under National Banking System 

credit was mischievous in the extreme, and it can be 
justified only on the plea of absolute necessity. 

This plea, in my opinion and in the judgment, I believe, 
of the soundest clearing-house authorities, is quite unten- 
able. The issue of loan certificates was a recourse still 
open to every solvent bank, and the banks which did 
shut down on cash payment to depositors included several 
of the soundest institutions in the city, July's shipments 
of currency, to meet deposit withdrawals of interior banks 
and other institutions, were indeed extremely heavy, but 
on August 5 there was still left in the New York clearing- 
house bank reserves $79,218,500 specie and legal tenders. 
Moreover, at the very time when banks resorted to such 
partial suspension, importation of gold from Europe had 
begun. Any bank with securities on which to take out 
loan certificates was able, within seven days, to replace 
such certificates in American gold coin. 

But the plea of necessity was not the bankers' only plea. 
It was openly argued that the restriction on cash pay- 
ments had positively good results, in that it stopped with- 
drawals by money hoarders. Let us observe what were 
the actual results of this restriction. It was followed by 
a market phenomenon unfamiliar to the present genera- 
tion. Currency, as the phrase was, went to a premium. 
Two or three active Wall street money brokers at once in- 
serted newspaper advertisements offering a premium for 
gold or silver coin, or for paper legal tender currency. 
This premium was at first i yi and 2 per cent ; it rose once 
to 4 per cent. In quick response to these Advertisements, 
the hoarded money of New York and its vicinity poured 



423 



National Monetary Commission 

into the Wall street offices. The brokers paid for this 
currency, in turn, by certified checks on their own bankers. 
They sold the currency at an average advance of one-half 
of I per cent. Two classes of buyers chiefly furnished the 
demand. First, and most naturally, there were employers 
of labor with large weekly or monthly pay rolls, whose 
deposits lay in banks which flatly refused to pay them 
cash for checks. Second, and more numerous than might 
have been supposed, there were banks which were unwilling 
to refuse cash payments, but which were not averse to 
paying a premium to replenish their cash reserves. 

The first of these transactions makes the operation easy 
of analysis. Currency, it is said in common phrase, was 
bought with checks. But this statement involves an ab- 
surdity, for nothing had happened to alter the value of 
the currency. The actual transaction was-a sale of bank 
checks for money. Something had very obviously hap- 
pened to make the checks less valuable than they had 
been before. At the bank on which they were drawn 
these checks were now worthless for the one purpose for 
which their makers drew them — conversion into coin and 
bills of small denomination. They were sold in Wall 
street, therefore, for what they would bring in cash. 
Like irredeemable paper currency, their percentage of de- 
preciation — in other words, the premium on the kind of 
money needed — was measured by the ratio of supply and 
demand, and by the probability of their ultimate cash 
redemption. The supply of such checks offered last year 
in exchange fdr currency was large. But, on the other 
hand, early resumption of full cash payment by the banks 



424 



Crises Under National Banking System 

was universally expected, and the checks themselves, still 
being good for all banking transactions and exchanges 
through the New York clearing house, were as good as 
cash for the most of ordinary purposes. Therefore the 
"premium" on currency never rose exorbitantly high. 

But did this operation check individual hoarding of 
money? Obviously not. Withdrawal of funds from 
banks which refused cash payments ceased of course; 
but withdrawals from other banks were doubled. The 
logic of the bank restriction, therefore, pointed, if sound, 
to nothing short of general suspension. Nor was this all. 
A large part of the regular and individual bank depos- 
itors of money were driven away at once. The chances 
that a man with $ioo currency will deposit it in bank, 
when the bank announces that it will not return the 
money on demand, and when the currency may be " sold " 
for $102 in Wall street, are certainly small. The argument 
that the banks were forced to refuse cash payment, be- 
cause of the premium in Wall street, utterly confuses 
cause and effect. Of course, after the premium was offered, 
there was a chance that a depositor would withdraw his 
$100, sell it for $102 in Wall street checks, withdraw the 
$102 against this check, sell it again, and so on ad infini- 
tum. But this ignores the fact that the bank restrictions 
caused the currency premium. Had the banks all con- 
tinued to pay cash, no premium would have been possible. 
It is astonishing that anyone should question this. 
What Wall street broker in his sober senses would pay 
a $102 check for $100 currency when he could get $102 
money by presenting the same check at bank? 



425 



National Monetary Commission 

Hoarding was certainly increased by the bank restric- 
tions. Deposits of cash in banks almost wholly ceased, 
and domestic exchange was completely blocked. The 
experience of August proved beyond dispute the effect 
of the Wall street premium. This premium undoubtedly 
brought to sight great quantities of previously hoarded 
currency."^ But no sooner had this money been ex- 
changed and again disbursed than it vanished once more 
from sight. No one who passed that month in New 
York City will dispute this. So completely, under the 
bank restrictions, did paper money disappear that by the 
middle of August business of every kind was being done 
with specie, and people who in years had never touched 
a gold piece for their common uses were making daily 
payments in eagles and double eagles. This money came 
not from the "purchases" from currency hoarders, but 
from the European gold importations. By the end of 
August practically all the banks had resumed full pay- 

a For obvious reasons it is very hard to arrive at any trustworthy esti- 
mate of the amount of money thus brought into the market. The Wall 
street firm which did the largest proportion of the business estimates the 
amount of money which changed hands during the currency premium at 
$15,000,000; but this, though based on personal experience, is largely 
guesswork. Some uptown retail stores sold their daily receipts of cur- 
rency, a fact pretty publicly proved by the vigor with which other retail 
houses, in their advertisements at the time, boasted that they had regu- 
larly deposited their cash receipts in bank. There were, moreover, many 
sales of large blocks of currency, chiefly gold certificates, in lots as high 
as $100,000, which had evidently been locked up in safe deposit vaults. 
It was a striking incident that on the death, several months before the 
panic, of a well-known New Yorker, a man of wealth and financial repu- 
tation and a bank director, his executors found in his safe several hundred 
thousand dollars in gold certificates. The hoarding in New York was 
largely, and perhaps chiefly, speculative; in the interior, where it had far 
more serious effects, it was a natural result of the deposit and savings 
bank failures. 

426 



Crises Under National Banking System 

ment to depositors. But for a long time hardly any 
paper currency was paid; and how little the Wall street 
purchases contributed to the recovery the bank exhibits 
show. From August 5 to September 2, a period cover- 
ing the existence of the currency premium, the specie 
holdings of the New York City banks increased by 
$10,930,700.'^ But holdings of legal tenders increased 
only $1,785,800, and deposits only $1,064,900. 

o The net gold import during July was $5,776,401; during August, 
$40,622,529. Much of this gold was, however, ordered by Chicago and 
Boston capitalists and shipped direct to them. Still more was imported 
by Wall street exchange bankers and sold by them at a premium to 
savings banks, corporations, and business houses. The restriction on 
bank payments to depositors was the reason why no gold, except that 
ordered personally by bank officers, was deposited in the banks. 



6158 — 10 28 427 



Note J. 

REPORT OF THE NEW YORK CLEARING-HOUSE COMMITTEE, 
ACTING AS A LOAN COMMITTEE IN 1907 

At a meeting of the Clearing House Association, held 
October 26, 1907, to consider the disturbed state of finan- 
cial affairs and to take such remedial action as might be 
possible, the undersigned clearing-house committee, with 
the president of the association, were appointed to act 
as a loan committee with power to associate with them 
such other bank officers as they judged necessary. 

It had been hoped that the crisis imminent for a week 
previous might be successfully met without the necessity 
for the issuance of clearing-house loan certificates, in spite 
of the urgent application for assistance from several banks, 
members of the association. Such assistance had been 
given through joint action of many of the banks who 
advanced cash to the applying banks, receiving partici- 
pating receipts for their several payments and the clearing- 
house committee holding the collateral security at the 
clearing house. 

Public apprehension grew so rapidly, however, and the 
drain upon all the banks so severe that it was soon evident 
that no inferior expedient would suffice to make effective 
the aid which it was apparent must shortly be solicited by 
other members of the association, and the committee then 
determined to recommend the appointment of a loan 
committee. 

The committee was unanimously appointed at noon, 
October 26, 1907, and forthwith proceeded to issue loan 
certificates, blank certificates and proper stationery having 
been stored at the clearing house for such an emergency. 

Under .the terms of the resolution creating the com- 
mittee, the following bank officers were appointed as 

a.28 



Crises Under National Banking System 

associates of the committee; Messrs. James G. Cannon, 
vice-president Fourth National Bank; Henry P. Davison, 
vice-president First National Bank; Walter E. Frew, 
vice-president Corn Exchange Bank; Gates W. Mc- 
Garrah, president Mechanics National Bank; Albert H. 
Wiggin, vice-president Chase National Bank. 

To these gentlemen was assigned the duty of passing 
upon the collateral offered for loans, and certifying to its 
sufficiency before the issuance of certificates. 

The assistance rendered by the members of the asso- 
ciate committee materially Ughtened the labors of the 
loan committee, and the systematic methods employed 
in handling the mass of collateral pledged for certificates 
insured the transaction of the business of the committee 
without delay or complication. 

Eleven million two hundred and thirty-five thousand 
dollars in certificates were issued to take up the partici- 
pating receipts given for loans advanced from October 19 
to October 26, and the interest due for such advances was 
included in the first distribution of interest on the 15th 
of the following month. 

Until near the retirement of all but a small portion of cer- 
tificates issued, your committee met on the morning of every 
business day and frequently after noon, at least three mem- 
bers always being present and generally all of the committee. 

The date of the first issue was October 26, 1907. 

The date of the first cancellation was November 14, 1907. 

The date of the final issue was January 30, 1908. 

The date of the final cancellation was March 28, 1908. 

Gross issue, $101,060,000. 

Maximum amount outstanding was $88,420,000, Decem- 
ber 16, 1907. 

429 



National Monetary Commission 

During this period there passed through the hands of the 
committee, including original deposits of securities, substitu- 
tions of securities (both withdrawals and deposits) collateral 
aggregating in amount $453,000,000, of which $330,000,000, 
or 72.92 per cent, consisted of commercial paper and 
$123,000,000, or 27.08 per cent, was made up of stocks, 
bonds, and short-time railroad and other similar notes. 

Of the 52 banks constituting membership in the asso- 
ciation 32 took out loan certificates, from whom was 
received in interest $1,116,245.83, which amount, of 
course, was paid to banks holding said certificates. 

Three thousand five hundred and forty-eight loan cer- 
tificates were issued, as follows: 

412 at $100,000 each $41, 200,000 

522 at $50,000 each 26, 100,000 

1,005 at $20,000 each 20, 100, 000 

1,123 at $10,000 each u, 230,000 

486 at $5,000 each 2, 430, 000 

The greatest amount of certificates issued to any one 
bank was $17,000,000 and the smallest $250,000, the latter 
amount in two cases. 

The time elapsed from the first issue, October 28, 1907, 
to the final cancellation, March 28, 1908, was twenty-two 
weeks, or one hundred and fifty-four days, as compared 
with nineteen weeks, or one hundred and thirty-three days, 
in 1893. 

Respectfully submitted. 

J AS. T. Woodward, Chairman. 
W. A. Nash, 

DUMONT ClyARKE, 

A. B. Hepburn, 
Edward Townsend, 
A. Gilbert, 

Clearing House Committee. 
New York, April 7, igo8. 

430 



Crises Under National Banking System 
Additional data relating to loan certificates: 



RESOLUTION APPOINTING COMMITTEE. 

(Adopted October 26, 1907.) 

Resolved, That the clearing-house committee, with the president of the 
association, be authorized to receive from banks, members of the asso- 
ciation, bills receivable and other securities to be approved by said com- 
mittee, who shall be authorized to issue therefor to such depositing banks 
loan certificates bearing interest at 6 per cent per annum, and such loan 
certificates shall not be in excess of 75 per cent of the market value of the 
securities or bills receivable so deposited, and such certificates shall be 
received and paid in settlement of balances at the clearing house, and all 
rules and regulations heretofore adopted in the issue of such certificates 
shall be in force in the present issue. Said committee shall have power 
to associate with it such other bank officers as they may judge necessary. 

The percentage of maximum amount of certificates outstanding Decem- 
ber 16, 1907 ($88,420,000), to total net deposits of clearing-house banks 
($1,066,865,900) was 8.28. 

The percentage of aggregate amount of certificates issued ($101,060,000) 
to deposits as above was 9.38. 

Table showing use of loan certificates in paying balances 
at the clearing house: 





Total 
balances 


( 
Loan certifi- 
cates paid in 


Per cent. 


1907. 

October O- . 


$64,648,593 
218, 702, 63s 
203,340, 855 

337,895, 293 


$54, 460, 000 
211, 475,000 
198, 200, 000 

64, 575, 000 


84 
96 
97 

19 




December __, 

1908. 




Total 


824,587.376 


528. 710, 000 


64 



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433 



Note K. 

Substitutes for Cash in the Panic oe 1907.'^ 

By A. Piatt Andrew. 

The autumn of 1907 witnessed what was probably the 
most extensive and prolonged breakdown of the country's 
credit mechanism which has occurred since the establish- 
ment of the national banking system. Upon no previous 
occasion have the banks of so many cities resorted to 
clearing-house loan certificates for the settlement of their 
mutual obligations; never before have they issued them in 
such large amounts, nor for such long periods of time; and 
never have these certificates been so extensively issued 
in small denominations to meet ordinary bank obliga- 
tions in lieu of cash. Even during the critical periods of 
1873 and 1893 it is unlikely that as many banks limited 
the payment of their obligations in cash, although the 
proportion of existing banks which so restricted payments 
may have been as large. In the pages that follow will 
be found some record of these phenomena, of the several 
ways in which banks and other firms limited their cash 
payments, of the issue of loan certificates in the clearing 
houses of the country, and of the ingenious invention of 
multifarious other substitutes for legal currency during 
the weeks of hoarding and suspension. 

Of official encouragement to suspension, singular and 
striking examples occurred in several States. The most 
extreme instances were the legal holidays declared by 



a The Quarterly Journal of Economics, August, 1908. 
434 



Crises Under National Banking System 

some of the Western governors, which were intended to 
authorize banks, as well as other firms and individuals, to 
decline payment when unduly pressed or wherever they 
saw fit. The governor of Nevada was the first to resort 
to this measure. Beginning on October 24, he declared 
legal holidays continuously up to and including November 
4. On October 28 the governor of Oregon also began 
declaring such holidays, and he continued to declare them 
by subsequent proclamations until December 14. In 
California such holidays were proclaimed without inter- 
ruption for a still longer period, from October 31 to De- 
cember 21, thus suspending all debts for more than seven 
weeks. This method of relieving business involved great 
inconvenience in unexpected ways. The whole judicial 
system was thereby brought to a standstill, the courts 
being even restrained from trying criminal cases. The 
governor of California very soon felt obliged to call a special 
session of the state legislature, and so secured authority 
to declare "special holidays" during which only civil 
actions based upon expressed or implied contracts for the 
payment of money would be precluded. 

Scarcely less radical was the action of the officials who 
supervise banking in several Middle Western States. In 
Indiana the attorney -general, who had been invited to 
the meeting of the State Bankers' Association at which it 
was decided to suspend payments, advanced the opinion 
that no state law was violated in limiting payments on 
deposits, when demanded, if it was proposed to make a 
small payment in each case. At the same time the 
auditor of the State addressed the following hastily com- 



435 



National Monetary Commission 

posed letter to all banks and trust companies within his 
jurisdiction, virtually advising them to suspend and giv- 
ing assurance that the question of their solvency would 
not be officially raised : 

Indianapolis, October 28, igo'j. 
To the Indiana Banks and Trust Companies: 

Gentlemen; Your bank being solvent, should it adopt the same rule 
that has been adopted by the banks of Indianapolis and refuse to pay to 
any depositor or holder of a check only a limited amount of money in 
cash and settle the balance due by issuing certified checks, or drafts on 
correspondents, such act, in this emergency, will not be considered an 
act of insolvency by this department. 

The same rule will apply to trust companies. 

John C. BillhEimER, 

Auditor of State. 
P. S. — The question of your solvency is to be determined by yourselves 
upon an examination of your present condition. 

Similarly, in South Dakota, the public examiner and 
superintendent of banks wrote to the state banks through- 
out that State, calling their attention to the action of the 
banks of Sioux Falls and Madison in limiting the size of 
cash withdrawals to $10, and in issuing cashier's checks 
to take the place of currency. He recommended that 
they do likewise, as indicated in the following excerpt: 

I would suggest and recommend that where there is more than one 
bank in a town they get together and agree along similar lines, for the 
protection of themselves as well as the public, and where there is only one 
bank that such bank take the matter up single-handed or confer with 
banks in the towns near by. 

I would also suggest that you get the business men of your town together 
and explain to them the situation and the proposed plan, and in this way 
secure their approval and support. 

This method will of course be trying and unpleasant as well as incon- 
venient not only to the banks but to their depositors, but when the people 
understand they will gladly cooperate for the mutual good. Conditions 
will improve rapidly and the situation will soon become normal. 
Respectfully, 

John L. Jones, 

Public Examiner. 



436 



Crises Under National Banking System 

So, too, in Iowa, the auditor, B. F. Carroll, at the out- 
break of the panic, wrote a circular letter of similar 
import to the bankers of that State containing this 
advice : 

I therefore suggest that you call your board of directors together at 
once; canvass the situation; take such precautionary steps as may be 
necessary in order to protect your interests and the interests of your 
depositors. The department will temporarily permit such latitude as to 
reserve and other legal restrictions as circumstances may demand. You 
should take the depositors into the confidence of the bank; fully explain 
to them the situation and ask them to cooperate to the extent of accepting 
checks, drafts, and other forms of credit where the same can be used cur- 
rent and to withdraw just as small amounts of cash as is possible for them 
to use in the transactions of their business. It may be necessary for your 
bank to limit the amount of cash payments to depositors. 

In Oklahoma, at a meeting of the State Bankers' 
Association, "the bank commissioner when asked to make 
a statement regarding the plan upon which the bankers 
had agreed, and which, in brief, was to make only limited 
cash payments, stated that while he could not officially 
agree to the plan, that no banks would be closed because 
they followed the plan." 

In the majority of States, however, it is only just to 
say that the bank commissioners and superintendents, 
though tacitly tolerating the restriction of payments, very 
much as did the Federal Comptroller of the Currency in 
the case of the national banks, nevertheless gave no 
explicit assent, much less recommendation to the practice. 

The record presented in the accompanying table en- 
deavors to exhibit as concisely as possible the extent to 
which the banks in the larger cities of the country limited 
their payments of cash and created substitutes therefor 
during the panic. It is the result of inquiries addressed 



437 



National M on et ar y Commission 

to banks in all cities of 25,000 or more inhabitants. 
According to the census of 1900 there were approxi- 
mately 147 such cities which were independent of each 
other. We exclude by the use of the word " independ- 
ent" those cities which are really suburbs or parts of 
larger neighboring cities, and which directly or indirectly 
"bank" through their institutions. In the neighborhood 
of Boston, for instance, we exclude from separate reck- 
oning such separate mimicipalities as Cambridge, Maiden, 
Newton, Somerville, and Chelsea, the banks of which 
practically "clear" through the Boston clearing house, 
and consequently follow its policy. In the case of New 
York we omit environing and related cities like Hoboken, 
Jersey City, Newark, Passaic, and Elizabeth; in the case 
of Pittsburg, Allegheny City; in the case of St. Louis, 
Bast St. I^ouis; in the case of Omaha, South Omaha, etc. 
No sharp line can be drawn, however, between the " inde- 
pendent" and the "affiliated" cities, and several of the 
inclusions as well as some of the exclusions will doubtless 
appear arbitrary. 

Reports from the 145'* largest independent cities show 
that during the disturbances of 1907, in at least 71, or 
nearly half, resort was made by the banks to clearing- 
house loan certificates, clearing-house checks, cashiers' 
checks payable only through the clearing house, or other 
substitutes for legal money ; in 20 others the larger cus- 
tomers of the banks were asked to mark their checks 
"payable only through the clearing house;" and in at 

o From two cities of more than 25,000 inhabitants, Pueblo, Colo., and 
Lawrence, Mass., repeated letters of inquiry have elicited no response. 



438 



Crises Under National Banking System 

least one other, where these practices were not pursued, 
the size of checks that would be cashed was restricted. 
Roughly speaking, in two- thirds of the cities of more 
than 25,000 inhabitants the banks suspended cash pay- 
ments to a greater or less degree. 

From the last column of Table I it will be seen that in 
36 of the larger cities, where an emergency currency was 
issued, the banks for a time limited by agreement the cash 
which any customer could withdraw to a stipulated 
amount. This limitation varied all the way from $10 to 
$300. In the other cases, marked "discretionary," cus- 
tomers were asked, and generally obliged, to limit their 
withdrawals of cash, and were asked to stamp their checks 
"payable only through the clearing house," but no math- 
ematical limit was placed upon the amount that could be 
withdrawn. 



439 



Nat.ional Monetary Commission 



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Nov. 21. 1908 

Nov. 26, 1908 
Dec. 20, 1907 

Dec. 28, 1907 

Nov. 19, 1907 

Dec. 4-6, 1907 

Nov. 23, 1907 
Nov 27, 1907 
Nov. 6, 1907 

Nov. 26, 1907 

Nov. 10, 1907 
Dec. I, 1907 


503,000 

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5.956,601 

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20, 000 

136, 000 

148, 600 
940, 000 

3.548,000 

I, 060, 000 

as 25 cents. 

417. 000 


Jan. 28. 1908 

Jan. 4. 1908 
Jan. 10. 1908 

Jan. 24. 1908 
Jan. 30. 1908 

Feb. I. 1908 

Jan. 17. 1908 
Jan. 5, 1908 
Feb. 7, 1908 
Jan. 10. 1908 

Jan. 14, 1908 
Feb. 7, 1908 
Dec. 16, 1907 

Feb. 8,1908 
Feb. 15, 1908 
Apr. I, 1908 
Jan. 28, 1908 

Feb. 18, 1908 

Jan. 14, 1908 

ominations as low 

Jan. 30, 1908 


Oct. 28, 1907 

Oct. 30. 1907 
Oct. 28. 1907 

obtainable. 
Nov. 20, 1907 
Oct. 31.1907 

it not issued.) 

[ Nov. I 2. 1907 

obtainable. 
Nov. 4, 1907 
Nov. 10, 1907 
Nov. 6. 1907 
Oct. 30. 1907 

Nov. 7. 1907 
Nov. 13, 1907 
Nov. 1 , 1907 

obtainable. 

Oct. 31, 1907 
Oct. 30, 1907 
Nov. 25, 1907 
Oct. 30, 1907 
obtainable. 

fOct. 28, 1907 

Nov. 1 , 1907 

obtainable. Den 

Nov. 5, 1907 



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6158 — 10 29 



443 



National Monetary Commission 

In addition to the places named in the table the banks 
of the following cities of 25,000 or more inhabitants also 
restricted payments to the extent of asking their larger 
customers to mark their checks ' ' payable only through the 
clearinghouse:" 

AUentown, Pa. Mobile, Ala. 

Bay City, Mich. New Haven, Conn. 

Binghamton, N. Y.a Oshkosh, Wis. 
Dayton, Ohio (one trust company). Pawtucket, R. I. 

Erie, Pa. Reading, Pa. 

Evansville, Ind.^i Saginaw, Mich. 

Fall River, Mass.o Springfield, Mass. 

Gloucester, Mass. Syracuse, N. Y.a 

Hartford, Conn. Woonsocket, R. I. 

McKeesport, Pa. York, Pa. 

In at least one other city, Grand Rapids, Mich., where 
neither clearing-house currency nor other emergency 
substitutes was issued, and where depositors were not 
asked to so mark their checks, the size of checks which 
would be cashed was nevertheless limited. 

The cities rated by the census of 1900 as having more 
than 25,000 inhabitants, in which, if the replies of my 
correspondents are to be trusted, depositors were subjected 
to no restriction of payments, and no resort was made to 
emergency devices, numbered 53. In some of these, to 
be sure, as, for instance, Chattanooga, Tenn., Richmond, 
Va., and Galveston, Tex., cash payments were limited to 
the extent that clearing-house balances were settled dur- 
ing the panic in exchange on a reserve city instead of in 
currency, but this practice is frequently followed even in 

o In these cities, customers sending checks out of town were asked to make 
their checks payable only through the clearing house in order to prevent 
their collection by express. 



444 



Crises Under National Banking System 

quite normal times. The list of cities which, with this 
possible exception, remained upon a cash basis follows: 



City. 


Population 

(census of 

1900). 


City. 


Population 

(census of 

1900) 




42, 000 
94, 000 
38, 000 
27,000 
30, 000 
40, 000 
70, 000 
30, 000 
75,000 

30, ooo' 
33.000 
42, 000 
36, 000 
35.000 

31, 000 
26, 000 
37.789 
37.000 
45,000 
25, 000 
28, 000 
35.000 
28, 000 
41. 000 
94, 000 
56, 000 
62. 000 




25, 000 


Albany, N. Y ... 


New Castle, Pa 




Newport. Ky 

Norfolk, 'Va.. 




Atlantic City, N. J 




Auburn, N. Y 


Paterson, N. J . .. 


105. 000 
SO, 000 
36, 000 
85. 000 




Portland, Me.. 






Butte, Mont _ . 




Camden, N. J- 


Rochester. N. Y.. 


Chattanooga, Tenn 


Rockford, 111 

Salem, Mass 

Schenectady, N. Y 

Scranton, Pa 

Springfield, 111 




Chester, Pa 

Covington, Ky 

Dubuque, Iowa 

Elmira N. Y 


35.000 
31, 000 
102, 000 
34,000 
38, 000 




Springfield, Ohio 


Fort Worth, Tex 


Terre Haute, Ind 

Toledo, Ohio 

Trenton, N.J. 


Galveston, Tex . - 










Troy. N. Y 

Utica, N. Y ... 








Jacksonville, Kla 

Johnstown, Pa 


Washington, D. C 




Waterbury, Conn 




Wilkes-Barre, Pa 


5 1, 000 














Yonkers, N. Y 















The roll of honor among the cities, if one were to ar- 
range them in the order of their magnitude, would begin 
as follows: Washington, Rochester, Toledo, Worcester, 
Paterson, Scranton. It includes 8 cities in Massachusetts, 
8 in New York, and 8 in Pennsylvania, 4 in New Jersey, 3 
in Ohio, 3 in Connecticut, 3 in Illinois, 2 in Kentucky, 2 in 
Virginia, 2 in Texas, and i each in Florida, Indiana, 
Iowa, Maine, Michigan, Montana, New Hampshire, Ten- 

445 



National Monetary Commission 

nessee, Wisconsin, and the District of Columbia. In the 
remaining 26 States there was apparently no city with a 
population of 25,000 in which the banks did not partially 
restrict their payments during the panic. 

The universality with which the panic of 1907 ranged 
over the United States is also well attested by the fact that 
there are only 6 States from which I have no record of 
restriction of payments and issue of substitutes for cash on 
the part of the banks, namely, Maine, Vermont, South 
Dakota, Montana, Idaho, and Wyoming. Several of these 
States, it may be added, contained no city of 25,000 in- 
habitants, and from them no information was received at 
all. Their banks may also have limited payments and 
issued emergency ctirrency without its appearing in the 
record here presented. 

Financial excitement in 1907 was by no means confined 
to the larger cities. Limitation of payments and the 
creation of emergency currency occurred in towns of every 
degree of smallness all over the country. Our record 
(Table II) of such issues is of necessity fragmentary. 
Names of a number of towns are included where emergency 
currency was known to have been issued, but from which 
repeated letters of inquiry failed to elicit any reply as to 
the amount. Unquestionably, the names of scores of 
towns in which such currency was employed have not 
chanced to reach the writer's attention. The table here 
given presents an explicitly avowed issue of nearly 
$4,500,000 in the case of 33 towns and cities; but it doubt- 
less includes only a small fraction of what actually existed 
in the smaller localities of the country .during the panic. 



446 



Crises Under National Banking System 



Table II. — Currency substitutes in cities of less than 25,000 inhabitants 



Cities. 



Atchison, Kans. . 

Bainbridge. Ga 

Berlin. N.H 

Berkeley. Cal 

Bishop, Ga 

Blakely, Ga 

Brunswick, Ga 

Columbia. S. C... 

Columbus, Ga 

Danville, Va 

Dawson, Ga 

Douglas, Ga 

Fargo, N. Dak... 

Gadsden, Ala 

Gaffney, S. C 

Greensboro, N. C- 
Greenwood, S. C- 
Guthrie, Okla 



Hastings, Nebr. 



Hattiesburg, Miss 

Henderson. Ky . 

Iron River, Mich 

Jackson, Ga 

Key West, Fla 

Kalamazoo, Mich 

Las Vegas, N. Mex . . . 

Lynchburg, Va 

Macon, Ga 

Milledgeville, Ga 

Muskogee, Okla 

Newnan, Ga 

New Carlisle, Ind 

Oklahoma, Okla 

Ogden, Utah 

Rome, Ga 

Sedalia, Mo 

South Boston, Va 

Sylvester, Ga 

Tampa, Fla 

Thomaston, Ga 

Thomasville, Ga 

Tifton, Ga 

Valdosta. Ga 



Kind 

of 
device. 



B 
B 
B 
B 
D 
B 
D 
A. B 
D 
B 
D 
B 
B 
B 
B 
B 
B 
B 



Total 
Amount 
issued. 



Date of first 
issue. 



40,000 Nov. 1,1907 
125,000 Nov. 6,1907 
Amount not obtainable. 

34,000 I Nov. S. 1907 
Amount not obtainable. 
Amount not obtainable. 



Date of retirement. 



Jan. 
Mar. 



Jan. 



1908 
1908 



1908 



109 


000 


Nov. 


6. 


1907 


Mar. 


28, 


ino8 


250 


000 


Oct. 


24. 


1907 


Mar. 


I , 


1908 


320 


000 


Nov. 


I, 


1907 


Jan. 


22, 


:9o8 


617 


200 


Oct. 


30, 


1907 


Jan. 


9. 


1908 


45 


000 














SO 


000 


Nov. 


I , 


1907 


Mar. 


I , 


1908 


33 


500 


Oct. 


29 


1907 


Jan. 


18 


1908 


8 


000 


Nov. 


IS 


1907 


Jan. 


I , 


1908 


20 


000 


Nov. 


1 1 


1907 


Jan. 


I , 


1908 


39 


100 


Nov. 


4. 


1907 


Jan. 


2S 


1908 



Amount not obtainable. 
Amount not obtainable. 

7,713 I Oct. 28, 1907 
j Amount not obtainable. 

40, 000 I Oct. I, 1907 
82.000 Oct. 30,1907 
24.000 j Nov. 12,1907 
Amount not obtainable. 
Amount not obtainable. 
Customers asked to make chec 
30,000 I Nov. 1,1907 
381.000 Nov. 18,1907 
325,000 I Nov. 4,1907 
Amount not obtainable. 
Amount not obtainable. 
Amount not obtainable. 
Amount not obtainable. 

Nov. I, 1907 
Nov. I, 1907 
Nov. I, 1907 
Nov. 15, 1907 
Nov. 5, 1907 
Amount not obtainable. 

Nov. 22. 1907 
Oct. 28. 1907 
Nov. I. 1907 
Nov. 6. 1907 
Nov. I, 1907 



200 


000 


circ.2 7s 


000 


120 


000 


100 


000 


100 


000 



I2S 


000 


10 


000 


40 


000 


50 


000 


100 


000 



Dec. 


20, 


1907 


Dec. 


IS. 


i9o7 


Jan. 


9. 


1908 


Dec. 


24. 


1907 


s payable in 


exchange 


Dec. 


31. 


1907 


Jan. 


13. 


1908 


Jan. 


31. 


1908 



Jan. 
Dec. 
Jan. 
Jan. 



Feb. 
May 
Jan. 
Feb. 
Feb. 



1908 
1907 
1908 
1908 



1908 
1908 
1908 
1908 
1908 circ. 



447 



National M on et ar y Commission 



Table II. — Currency substitutes in cities of less than 25,000 inhabitants- 
Continued. 



Cities. 



Vicksburg, Miss 

Virginia, Minn 

Waycross, Ga 

Willacoochee, Ga 

Winston-Salem, N. C--. 

Total 



Kind 

of 

device. 



Total 
Amount 
issued. 



Date of first 
issue. 



j?i7o,ooo Nov. 23,1907 
200,000 I Nov. 10,1907 
Amount not obtainable. 
Amount not obtainable. 



350, 000 



Nov. I, 1907 



Date of retirement. 



Apr. 25,1908 
Dec. 20, 1907 



Jan. 1, 1908 circ. 



A = clearing-house loan certificates in large denominations for the settlement of bank 
balances. 

B = clearing-house loan certificates in small denominations for general circulation. 

C =clearing-house checks in convenient denominations for general circulation. 

D= cashiers' checks in convenient denominations payable only through the clearing 
bouse, and usually secured by the deposit of collateral with the clearing house. 

F=certificates of deposit in convenient denominations. 

An attempt has been made in the second column of 
Tables I and II to classify the various kinds of substi- 
tutes for cash, and to indicate which kind was employed 
in each city. Seven different sorts have been distin- 
guished, but some of them closely resemble each other, 
and the multiple variations among individual devices 
renders such a grouping at times uncertain. 

(a) The familiar expedient of issuing clearing-house 
loan certificates in denominations ranging from $500 to 
$20,000 for use in settling interbank balances has never 
been resorted to upon such a scale as in 1907. During 
the panic of 1893 eight cities were reported to have em- 
ployed them; but during the disturbances of 1907 they 
were used by no less than 42. In 1893 their issue was 
confined mainly to the Northeast, New Orleans being the 
only southern, and Detroit the most western example,^ 

o See John De Witt Warner, The Currency Famine of 1893, in Sound 
Currency, vol. ii. No. 6; A. D. Noyes, The Banks and the Panic of 1893, 
Political Science Quarterly, vol. 9. 

448 



Crises Under National Banking System 

but in 1907 their use knew no geographic Hmitations. 
They were issued in several cities of CaUfornia, Washing- 
ton, and Oregon, in cities of Texas, Alabama, Louisiana, 
and Arkansas, and in almost every sizable city of the 
Middle West, the most salient exceptions being Cleveland 
and Cincinnati, in which, however, the banks by agree- 
ment made no demand upon each other for currency in 
payment of balances during the panic. 

A comparison of the amounts issued in the same cities 
in the course of the two emergencies is of significance. 
In New York City the issues of 1907 totaled a sum two 
and a half times the largest issues that had ever been, 
made before; in Pittsburg they amounted to more than 
seven times those of the earlier date; in New Orleans, to 
five times; Detroit, to four times; in Baltimore, to twice 
the issues of 1893; but in Boston, Philadelphia, and 
Buffalo the amounts ran about the same in both crises. 
The aggregate issue of regular clearing-house certificates 
in the entire country during the panic of 1907 was 238 
millions, or nearly three and a half times the total of 1893. 



1893. 



New York 

Boston 

Philadelphia. 

Baltimore 

New Orleans. 

Pittsburg 

Buffalo 

Detroit 

Other cities. . 

Total. 



^41 , 490, 000 

1 1 , 645, 000 

II, 000, 000 

I, 475,000 

I, 029, 000 

987, 000 

985, 000 

SCO, 000 

69, III, 000 



5ioi , 060, 000 

12. S9S. 000 

13. 69s, 000 

3, 094, 000 

5, 226, 000 

7, 44S. 000 

915 . 000 

2, 145, o°o 

91,878, 175 

238.053, 175 



449 



National M on et ary Commission 

(b) The original purpose of clearing-house certificates, 
as set forth by their authors and exponents and as they 
were employed down to 1893, was for use in settling bal- 
ances between the banks. During the panic of 1893, for 
the first time, clearing-house associations issued certificates 
in currency denominations to be used by the banks in 
paying their customers. Their issue, however, was prac- 
tically confined to the Southeastern States.'* In the panic 
of 1907 Georgia was again, as in 1893, the center for 
emergency circulation of this sort, what were called " clear- 
ing-house certificates" being issued in at least 21 Georgia 
towns; but devices of that name were also put in cir- 
culation in many other parts of the country, and not 
infrequently even by banks of small towns, where no 
clearing house had ever existed. In such cases they 
were issued under the auspices of temporary committees 
of the local banks, which accepted and held the collateral 
offered to guarantee their redemption. In Douglas, Ga., 
for instance, a town with an estimated population of 
2,500, $50,000 in these so-called "clearing-house certifi- 
cates" were issued; in Tifton, Ga., with less than 3,000 
inhabitants, $50,000 in certificates were also issued; in 
South Boston, Va., with less than 4,000 inhabitants, an 
issue of as much as $100,000 in certificates was made ; even 
in Bishop, Ga., with only 400 inhabitants, a limited amount 
was issued. 

These small certificates, like the large ones, were se- 
cured by collateral deposited with the clearing-house 
committee, and were practically guaranteed by all of the 

"^See Warner, op. cit., p 6. 
450 



Crises Under National Banking System 

associated banks, in that these banks agreed to accept 
them at par for the sum named. The description of 
collateral in most cases was a general affirmation that 
"this certificate is secured by the deposit of approved 
securities." But sometimes there was more detail, as in 
Portland, Oreg., where it was asserted that the banks 
have deposited "notes, bills of exchange, and other ne- 
gotiable instruments secured by wheat, grain, canned 
fish, lumber actually sold, and other marketable products, 
and bonds approved by the committee," etc.; or in the 
case of Charleston, S. C, where there were said to be de- 
posited "securities of double the value of this certificate, 
or bonds of the United States or of the State of South 
Carolina, or of the city of Charleston, or of the city of 
Columbia, lo per cent in excess thereof;" or in Danville, 
Va., where the payment of the certificate was "secured 
by the combined capital of these banks, also by collateral 
worth one-third more than all of the certificates issued." 
Sometimes redemption was promised on demand "in ex- 
change" (Topeka, Kans.) or "in clearing-house funds" 
(Spokane, Wash.). Sometimes the certificates were made 
payable "on or before three months from date" (Des 
Moines, Iowa), or on or before some special date, like 
April I, 1908 (Seattle, Wash.), or July i, 1908 (Knoxville, 
Tenn.). The certificates issued by the clearing house in 
Las Vegas, N. Mex. (sample No. 7), were frankly to be 
paid only ' ' when deemed advisable by the board of direc- 
tors." Those of the associated banks of Howard county, 
Ind., announced that "due notice of redemption will be 
given through the daily papers." Many of the certificates 



451 



National Monetary Commission 

were elaborately engraved (note reverse of San Francisco 
certificate) , and were shaped and colored so as to resemble 
ordinary bank or government notes. In denomination 
they usually ranged from $i to $20, but in some cases, as 
in Montgomery, Ala., they were issued for convenient 
sums all the way from 25 cents to $50. 

The compilation here presented, though very incom- 
plete, records an issue of $23,831,813 of such devices in 
the course of the panic of 1907. 

(c) Identical with these certificates in character and 
function, though differing in form, were the clearing-house 
checks issued in a number of cities. Like the certificates, 
they were issued by the associations to member banks upon 
the deposit of approved securities. Like them, they were 
accepted for deposit in any of the banks, but were pay- 
able only through the clearing house. They were also 
in currency denominations, and were often quite as elabo- 
rately engraved, so as to resemble currency. The one 
peculiarity which distinguished them from certificates 
was that, instead of merely certifying indebtedness on the 
part of the clearing-house association, they took the form 
of checks drawn upon particular banks, and signed by the 
manager of the clearing house. In Chicago a bank de- 
siring such checks deposited with the clearing house a cor- 
responding amount of the ordinary loan certificates of 
large denominations, and received the checks in currency 
denominations in exchange. They were also issued in 
Cleveland, Milwaukee, Youngstown, South Bend, and 
some smaller cities. Our record includes $12,060,248 of 
such issues. 



452 



Crises Under National Banking System 

(d) In spite of the provision of the National Bank Act, 
that no national banking association shall issue " any other 
notes to circulate as money than such as are authorized by 
the provisions of this title," a large number of national 
banks issued what were practically circulating notes in the 
form of cashier's checks in convenient denominations. In 
spite also of the lo per cent tax upon any notes issued 
by state banks, similar devices were issued freely and with- 
out hindrance by some of those institutions as well 
(e. g., in Superior, Wis.). These checks usually purported 
to be "payable to bearer," but they were "payable only 
through the clearing house," or "in exchange," or, as 
the phrase sometimes went, "in clearing-house funds." 
Occasionally, an apparent effort was made to circum- 
vent their illegality by making them payable to a sup- 
posed person. In St. Louis, Mo., and in Muskogee, Okla., 
they were made payable to "John Smith, or bearer," and 
in Memphis, Tenn., to " Richard Roe, or bearer." While 
in the Southeastern States it was common for the banks 
in the small towns to issue conjointly what they called 
" clearing-house certificates," in small towns of the Middle 
West the " cashier's checks" of individual banks were 
much more common. Sometimes these cashier's checks, 
like clearing-house certificates and clearing-house checks, 
were secured by the deposit of approved collateral with a 
committee of the clearing house, as, for example, in 
Denver, Colo., Omaha, Nebr., and Birmingham, Ala. In 
Richmond, Va., cashier's checks of a peculiar sort, called 
"bank money orders, " were prepared and printed by one 
institution, the American National Bank, but were never 



453 



National M on et ar y Commission 

actually issued. They optimistically declared upon their 
face that they were "good anywhere at any time, trans- 
ferable as many times as desired," and "payable any- 
where in the United States." 

(e) Another variety of currency issued during the panic 
were the New York drafts in denominations of $i and 
upward, issued by the banks of Birmingham, Ala., and 
which were used for pay rolls and general circulation in 
that locality. They were really cashiers' checks drawn 
on New York, but were drawn against actual balances 
held by particular New York correspondents. They were 
payable through the New York clearing house, and were 
not otherwise secured ; yet they appear to have circulated 
in and about Birmingham to the extent of millions of dol- 
lars without difficulty. The use of drafts upon reserve 
banks as currency appears to have been peculiar to Bir- 
mingham, although the cashiers' checks "payable in 
exchange," issued in many places, were not substantially 
unlike. 

(/) In a few instances the currency issued by the banks 
took the form of negotiable certificates of deposit in con- 
venient denominations. Sometimes these certificates as- 
serted that a particular person or company had made the 
deposit, as in the case of the bank of Winston-Salem, 
N. C. Sometimes the assertion was altogether general, as 
in the example from Berkeley, Cal. In some cases they 
bore interest, and were payable after the expiration of a 
certain period ; in others they were immediately accepta- 
ble by the issuing bank through the clearing house, and 
in such cases they bore no interest. 



454 



Crises Under National Banking System 

Of the issues of currency made by individual banks 
{d, e, j) I have only been able to obtain figures from a 
few cities. They reach a total of $13,541,500, but issues 
of that sort in the entire country would unquestionably 
build an aggregate several times this amount. 

{g) L-ast of all among the emergency devices were the 
pay checks payable to bearer drawn by bank customers 
upon their banks in currency denominations and used in 
all parts of the country in payment of wages and in set- 
tlement of other commercial obligations. These checks 
were generally " payable only through the clearing house," 
but they differed from those which have as yet been con- 
sidered, in that they were not a liability of the clearing- 
house association or of the bank on which they were 
drawn, but of the firm or corporation for whose benefit 
they were issued. 

The pay-check system reached its largest development 
in Pittsburg, where during the panic some $47,000,000 
were issued, much of which was in denominations of $1 
and $2. Their issue involved much more labor to the 
clearing house, to the banks, and to corporations using 
them than the issue of clearing-house checks would have 
caused, for most of them were rushed back to the bank 
within a week or ten days, and new checks had to be issued 
in their stead." It was claimed that a fifth as many cer- 
tificates for continuous circulation would have answered 
the same purposes, and would have saved much labor. 

olt is believed that about $10,000,000 in clearing-house checks for con- 
tinuous circulation would have answered all purposes, and would have 
saved much labor. When the pay-check clearances were at their height 
many extra clerks were added to the regular forces of the clearing-house 



455 



National Monetary Commission 

Pay checks were also issued by railroads, mining com- 
panies, manufacturers, and storekeepers in a large num- 
ber of other cities. Shops and stores and places of 
amusement in the neighborhood of their issue generally 
accepted them, and it is indeed surprising, considering 
their variety, their liability to counterfeit, and their gen- 
eral lack of security, how little real difficulty was experi- 
enced in getting them to circulate in lieu of cash. Of 
these issues, whose total doubtless ran into the hundred 
millions, we have no statistical data whatever except for 
the estimate in the case of Pittsburg. 

/ The banks of New York City determined upon the issue 
of their clearing-house loan certificates on Saturday, Octo- 
ber 26, and on the following Monday, October 28, the 
associated banks of many other cities in all parts of the 
country followed their example. In several places, how- 
ever, conditions hung fire for a couple of weeks, and sub- 
stitutes for cash were not instituted until the week begin- 
ning November 11. This was the case in such widely 

banks, and working until lo o'clock at night was not infrequent on Tues- 
days, Wednesdays, and Thursdays, when the pay checks came in by the 
basketfuls. 

During the height of the pay-check distribution some of the larger banks 
would receive from $500,000 to $700,000 worth of checks a day, including 
the amounts drawn on them and from the banks for which they clear. A 
few of the banks had from twelve to fifteen men sorting the pay checks, 
and separate quarters had to be provided for the work. The number of 
checks was very materially increased when the clearing house decided to 
issue the $1 and $2 checks, but after the third or fourth week the number 
of checks showed a marked falling off. The offices of large corporations 
were also very busy places before pay days, as all the checks had to be 
signed. Some clerks could sign 400 to 500 checks in eight hours, and the 
amount of men required and the labor involved in issuing from 30,000 to 
40,000 checks twice a month can be appreciated. — Special Correspondence 
from Pittsburg to the Evening Post, New York, January 16, 1908. 

456 



Crises Under National Banking System 

separated cities as Charleston, S. C; Dallas, Tex.; Canton, 
Ohio; Council Bluffs, Iowa; JoHet, 111.; Lexington, Ky.; 
Harrisburg and Easton, Pa., and Topeka, Kans. In Cleve- 
land, Ohio, cash substitutes were not resorted to until 
more than a month after the outbreak of the panic, 
not in fact until December 3, but this was altogether 
exceptional. 

The date of retirement given in the tables is neither 
exact nor uniform. In cities where banks to which loan 
certificates were issued failed during the panic, such cer- 
tificates may have remained uncanceled long after the 
certificates of solvent banks had been taken up and re- 
tired. In cities also where the certificates and checks 
entered the general circulation and became scattered over 
wide territory, some may have remained outstanding for 
a considerable time after the notice of retirement was 
published. In fact, small amounts, lost or destroyed or 
taken by collectors, may never be presented for redemp- 
tion. Some of the replies here tabulated indicate the 
date when • the banks ceased paying out the devices or 
gave notice of their retirement, others represent the 
time when substantially all of the certificates and checks 
of solvent banks had been retired, only in a few cases do 
they record the time when the entire amount had been 
redeemed. 

It is perhaps worthy of record in this connection that 
in New York the time elapsing between the first issue and 
the date of final cancellation of the certificates was twenty- 
two weeks, or three weeks longer than in the crisis of 1893, 
In Pittsburg, Los Angeles, and New Orleans the emer- 



457 



National Monetary Commission 

gency currency was outstanding also for about five 
months, but such duration was clearly exceptional. In 
most places the notes and certificates were rapidly re- 
tired soon after the beginning of the new year; i. e,, 
within eight or ten weeks after the date of their first 
issue. 

Surveying the record as a whole, we have here definite 
figures for $334,000,000 of emergency currency issued 
during the panic of 1907, classified as follows: 

Clearing-house certificates (large) $238, 000, 000 

Clearing-house certificates (small) 23, 000, 000 

Clearing-house checks 12, 000, 000 

Cashiers' checks 14, 000, 000 

Manufacturers' pay checks 47, 000, 000 

Total 334, 000, 000 

Making a very moderate allowance for the cashiers' 
checks and pay checks issued in cities from which their 
amounts have not been reported, including many of the 
largest cities like New York and Philadelphia, we may 
safely place an estimate of the total issue of substitutes 
for cash above $500,000,000. For two months or more 
these devices furnished the principal means of payment for 
the greater part of the country, passing almost as freely 
as greenbacks or bank notes from hand to hand and from 
one locality to another. The San Francisco certificates, 
for instances, circulated not only in California, but in 
Nevada and in southeastern Oregon, some reaching as 
far east as Philadelphia, some as far west as the Hawaiian 
Islands. The banks of Pittsburg, on the other hand, 
reported remittances of certificates and checks in denomi- 
nations ranging from $1 up from as scattered localities 

458 



Crises Under National Banking System 

as Cleveland, Cincinnati, St. Louis, Chicago, Milwaukee, 
Duluth, Philadelphia, Danville, Va., and Spokane. Most of 
this currency was illegal, but no one thought of prosecut- 
ing or interfering with its issuers. Much of it was subject 
to a lo per cent tax, but no one thought of collecting the 
tax. As practically all of it bore the words " payable only 
through the clearing house," its holders could not demand 
payment for it in cash. In plain language, it was an 
inconvertible paper money issued without the sanction 
of law, an anachronism in our time, yet necessitated by 
conditions for which our banking laws did not provide. 
During the period of apprehension, when banks were being 
run upon and legal money had disappeared in hoards, in 
default of any legal means of relief it worked effectively 
and doubtless prevented multitudes of bankruptcies 
which otherwise would have occurred. 



6158—10 30 459 



INDEX. 



Agriculture, and causes of crisis of 1893, 154. See ai^o Crops. 

Akron, in crisis of 1907, 445. 

Albany, suspension of cash payments (1873), 66; in crisis of 1907, 445. 

Allentown, Pa., cash restriction (1907), 444. 

Altoona, in crisis of 1907, 445. 

American Exchange National Bank, New York, effect of crisis of 1907 on 

bankers' deposits and reserve, 313. 
American Ice Company, failure, 248. 

American Watch Company, pay-roll difficulties (1873), 72. 
Andrew, A. P., on deposit of government surplus, 231; table of currency 

premium (1907), 280-282; on currency substitutes (1907), 314,434-459. 
Atchison, Kans., currency substitutes (1907), 447. 
Atlanta, cash restriction and currency substitutes (1907), 288, 440. 
Atlantic City, in crisis of 1907, 445. 
Atlantic State Bank, Brooklyn, failure, iii. 

Auburn, N. Y., pay-roll difficulties (1873), 74; in crisis of 1907, 445. 
Augusta, Ga., cash restriction and currency substitutes (1907), 440. 

B. 

Bainbridge, Ga., currency substitutes (1907), 447. 

Baldwin, O. D., minority report on clean ng-house reforms (1884), 385-386. 

Baltimore, clearing-house loan certificates (1873), 62; (1893, 1907), 408, 
449; suspension of cash payments (1873), 64; pay-roll difficulties (1873), 
73; loans during crisis of 1907, 299; cash restriction and currency sub- 
stitutes (1907), 440. 

Bank examination. Comptroller Cannon on efficiency, 359-367. 

Bank notes, reserve requirement before 1874, 9; amount (i 869-1 873), 
9, n-13; as bankers' deposits, redemption versus sale (1873), 28-29; 
G. S. Coe on, as reserve (1873), 96; requirement of reserves against, 
repealed, 105; and proposed reforms after crisis of 1873, 103, 120; and 
equalizing of reserves (1873), 121; redemption fund, 105, 136, 398; in 
crisis of 1893, 184; enlargement of issue during crises, 213, 316-318; 
increase (1900-1907), 217. 

Bank of Commerce, New York, and clearing-house loan certificates and 
loan expansion (1890), 143. 

Bank of England, advance in rate (1890), 141; (1906), 241; (1907), 284. 

46^ 



National Monetary Commission 

Bank of New York, effect of crisis of 1907 on bankers' deposits and reserve, 

313- 

Bank of North America, New York, suspension, 142. 

Bank of the Republic, Chicago, effect of crisis of 1907 on bankers' deposits 
and reserve, 313. 

Bankers' deposits, amount (1869-1873), 11-13; concentration in New York, 
15, 93, 232; condition of bankers' deposit and other national banks in 
New York (1872), 16-18; table of fluctuation (1871-72), 19; effect of 
payment of interest on, 20-24, 91-95, loi; and call loans, 24, 27, 30, 92; 
withdrawals (1872), 25-28, reliance on, in emergencies, 19, 27, 43-441 
86-88, 147, 305-307; and redemption of bank notes (1873), 28; con- 
ditions of New York banks (August and September, 1873), 34-35; meet- 
ing of demand on, during crisis, 51, 55, 70, 76; clearing-house committee 
on probable effect on, of abandonment of interest, 97, 376-377, 383; in- 
terest on, not abandoned, 104, 119, 120; and panic of 1884, 115, 117, 118; 
conditions causing decline (1890), 129; effect on, of crisis of 1890, 148; 
conditions before crisis of 1893, 166; during that crisis, 175; necessity 
of larger reserve against, 211, conditions (1897-1907), 222-224; of 
state banks held by national banks (1907), 225-226; power and con- 
dition of six New York banks (1907), 232-236; condition of these banks 
on suspension of cash payments, 265; effect of crisis of 1907 on bankers' 
deposits and reserves in certain banks of central reserve cities, 312-313; 
Comptroller Knox on withdrawal during crisis (1873), 332-334; A. D. 
Noyes on dangers in crisis, 415-418. See also Deposits, Reserves. 

Bankers' Magazine, financial review (1872), 25, 26; on financial conditions 
(April, 1873), 29-31; on inadequacy of reserves (1873), 33. 

Bankers National Bank, Chicago, effect of crisis of 1907 on bankers' de- 
posits and reserve, 313. 

Baring Brothers & Co., failure, 142. 

Barker Brothers & Co., failure, 142. 

Barton & Allen, suspension, 30. 

Bay City,;, Mich., cash restriction (1907), 444. 

Bayonne, N. J., cash restriction and currency substitutes (1907), 440. 

Berkeley, Cal., currency substitutes (1907), 447, 454. 

Berlin, N. H., currency substitutes (1907), 447. 

Billheimer, J. C, and crisis of 1907, 436. 

Binghamton, N. Y., cash restriction (1907), 444. 

Birmingham, Ala., cash restriction and currency substitutes (1907), 440, 

453, 454, 454- 
Bishop, Ga., currency substitutes (1907), 447, 450. 
Blakely, Ga., currency substitutes (1907), 447. 
Bogart & Co., O. N., failure, 11 1. 
Bonds, New York City, failure of issue (1907), 242. 
Bonds, United States, governmental purchase (1872), 26; (1873), 40, 42, 

326-327; (1889), 136; (1890), 137-139, 393-396. decline (1884), 112; 

issue during crisis of 1907, 316. 

462 



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ex 



Boston, clearing-house loan certificates (1873), 62; (1890), 145, 389-390; 
(1893, 1907), 408, 449; suspension of cash payments (1873), 67; pay- 
roll difficulties around (1873), 72; exchange on New York (1893), 204; 
(1907), 291; loans during crisis of 1907, 299, 420; direct gold import 
(1893), 427«.; cash restriction and currency substitutes (1907), 440. 

Bradstreet's, on dislocation of domestic exchanges (1893), 206-208; on 
conduct of banks during crisis (1893), 211. 

Branch banks, effect of lack, 249. 

Bridgeport, Conn., in crisis of 1907, 445. 

Brockton, in crisis of 1907, 445. 

Brownell & Bro., suspension, 30. 

Brunswick, Ga., currency substitutes 1907), 447. 

Buck, Robert, report on clearing-house reforms, 103. 

Buffalo, cash restriction and currency substitutes 1 1907), 440; amount of 
clearing-house loan certificates (1893, 1907), 449. 

Business. See Agriculture, Domestic exchange. Foreign exchange. Manu- 
facturing, Trade. 

Butte, in crisis of 1907, 259, 445. 



Cairo, 111., suspension of cash payments (1873), 66. 

California, legal holidays during crisis of 1907, 286, 435. 

Call loans. See Loans. 

Cambria Iron Works, pay-roll difficulties (1873), 73. 

Camden, N. J., in crisis of 1907, 445. 

Canada Southern Railway, and crisis of 1873, 36. 

Cannon, H. W., on panic of 1884, 113-114, 119, 345-370; on bank exami- 
nations, 359-367; and clearing-house loan certificates (1893), 410-412. 

Cannon, J. G., and clearing-house loan certificates (1907), 429. 

Canton, Ohio, cash restriction and currency substitutes (1907), 440, 457. 

Carleton, C. T., defalcation, 37. 

Carroll, B. F., and crisis of 1907, 437. 

Cashier's checks, use as currency ( 1907), 453-454, 458. 

Cedar Rapids, Iowa, cash restriction and currency substitutes (1907), 440. 

Central National Bank, New York, and bankers' deposits (1873), 15 w. 

Central National Bank, St. Louis, effect of crisis of 1907 on bankers' de- 
posits and reserve, 313. 

Central reserve cities, effect of law of 1887, 124-127. See a/j^o Chicago, New 
York, St. Louis. 

Certificates of deposit, use as currency (1907), 454. 

Charleston, exchange on New York (1893), 205; in crisis of 1873, 325; cash 
restriction and currency substitutes (1907), 440, 451, 457. 

Chase National Bank, New York, bankers' deposits (1907), 232, condition 
at time of suspension of cash payments, 267; effect of crisis on bankers' 
deposits and reserve, 313. 

Chattanooga, in crisis of 1907, 444. 

463 



National Monetary Commission 

Checks on outside banks, question of receiving such in New York as cash, 
loo-ioi, 105, 378, 384. See also Overcertification. 

Chemical National Bank, New York, and equalizing of reserves (1873), 121; 
effect of crisis of 1907 on bankers' deposits and reserve, 313. 

Chester, Pa., in crisis of 1907, 445. 

Chicago, grain shipments during crisis of 1873, 60; suspension of cash pay- 
ments (1873), 66; (1907), 287; clearing-house loan certificates (1873), 
67; (1893), 180, 209, 2ogn., 420; exchange on New York (1873), 75; 
(1893), 204; (1907), 291, 297; loans during crisis (1873), 83; (1893), 
209; (1907), 299; reliance on New York balances (1873), 88; as central 
reserve city, 124-127, 175; bank conditions (May, July, 1893), 173; 
bank failures during crisis of 1893, 176; direct gold imports, 194, 427 n.; 
banking conditions (1897-1907), 220; bankers' deposits (1897-1907), 223; 
effect on national banks of crisis of 1907, 309; effect on chief bankers' 
deposit banks, 313; cash restriction and currency substitutes (1907), 440, 
452. 

Cincinnati, clearing-house loan certificates (1873), 62, 65; suspension of 
cash payments (1873), 64-65; exchange on New York (1893), 205; 
(1907), 292; loan contraction (1907), 299; cash restriction and currency 
substitutes (1907), 440. 

Citizens Central National Bank, New York, effect of crisis of 1907 on 
bankers' deposits and reserve, 313. 

City National Bank, New York, bankers' deposits (1907), 232; condition 
at time of suspension of cash payments, 267, 268. 

Clarke, Dumont, and clearing-house loan certificates (1907), 430. 

Clearing House Association of New York, and closing of stock exchange 
(1873), 39-40; report on the crisis and reforms, 90-104; reports on clear- 
ing for nonassociated banks, 99, loi, 105, 378, 383-384; separate clear- 
ing house for stock exchange, 104, 152, 358, 379, 384; assistance to a 
suspended bank (1884), 114, 372; assistance to banks at beginning of 
crisis of 1907, 247-249; attitude toward control of a bank by one man or 
one interest, 251; attitude toward relief of trust companies (1907), 
252-256; address of G. S. Coe on crisis of 1884 and reforms, 371-379; 
power and responsibility during crisis of 1884, 371-375; report of com- 
mittee on reforms (1884), 380-386. See also Clearing-house loan certifi- 
cates. Equalizing of reserves. 

Clearing-house certificates, use as currency (1893), 198; (1907), 290, 314, 
450-452, 458. 

Clearing-house checks, use as currency (1907), 452, 458. 

Clearing-house loan certificates in New York, issues (1873), 45, 54, 54 w.; 
(1884), 112, 113, 118,353; (1890), 142, 143; (1893), 170,214,408; (1907), 
314, 449; origin and purpose, 47; and suspension of cash payments, 48, 
63, 123, 145-146, 171, 182, 213-215, 260, 272; issue should have been 
earlier (1873), 49; (1907), 257, 270-271 ; effect of issue (1873), 50; neces- 
sity of prompt issue, 114; and responsibility to country banks, 185; and 
gold imports (1893), 191; and money supply, 197; and equalizing of 

464 



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ex 



reserves, 273; Comptroller Cannon on issue of 1884, 350-353; G. S. Coe 
on issue of 1884, 374; Comptroller Lacey on issue of 1890, 387-389; report 
of committee on issue of 1893, 409-412; A. D. Noyes on loans and issue 
of 1893, 419-420; report of committee on issue of 1907, 428-431; table 
of use ( 1 860-1907), 432-433; period of use (1907), 457. 

Clearing-house loan certificates outside New York, issues of 1873, 62; of 1890, 
145; of 1893, 180, 209, 420; of 1907, 289, 290; Comptroller Lacey on 
issues of 1890, 389-392; Comptroller Eckels on issues of 1893, 407-408; 
A. P. Andrew on issues of 1893 and 1907, 434, 448, 456-458. 

Cleveland, pay-roll difficulties (1873), 73; loans during crisis of 1907, 299; 
cash restriction and currency substitutes (1907), 440, 452, 457. 

Coe, G. S., and clearing-house loan certificates, 47; report on crisis of 1873 
and reforms, 90-103; on panic of 1884, 119, 371-379; report on reforms 
(1884), 385- 

Columbia, S. C, currency substitutes (1907), 447. 

Columbus, Ga., currency substitutes (1907), 447. 

Columbus, Ohio, cash restriction and currency substitutes (1907), 440. 

Commercial and Financial Chronicle, on sale of bank notes (1873), 29; on 
strengthening reserves (June, 1873), 31; on outbreak of crisis of 1873, 
36-38, on dry-goods trade during crisis of 1873, 77-80; on panic of 1884, 
111-113; on preference for call loans (1890), 134; on failures in crisis of 
1890, 141; on use of clearing-house loan certificates (1890), 145; (1893), 
171; on government assistance (1890), 149; on failure of Natonal 
Cordage Company (1893), 164; on crisis of 1893, 176; on foreign pur- 
chase of securities, 179^. ; on gold imports and foreign exchange (1893), 
19I1 193; on currency premium, 196; on business stagnation, 202. 

Commercial National Bank, Chicago, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 

Comptroller of the Currency. See Cannon, Eckels, Knox, Lacey. 

Concord, N. H., suspension of cash payments (1873), 66. 

Consolidated Bank, New York, and crisis of 1907, 249. 

Continental National Bank, Chicago, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 

Cooke & Co., Jay, failure, 36; impending failure disclosed, 49. 

Copper, market in 1907, 242, 246. 

Corn Exchange National Bank, Chicago, effect of crisis of, 1907 on bankers' 
deposits and reserve, 313. 

Corporations, government regulating activity and crisis of 1907, 237, 242- 
244, 274. 

Cortelyou, G. B., on issue of bank notes during crisis of 1907, 317. 

Cotton, and crisis of 1873, 61. 

Council Bluffs, cash restriction and currency substitutes (1907), 440, 457. 

Country national banks, legal requirements as to reserves, 1 1 ; table of con- 
dition (1869-1873), 11; (September-November, 1873), 83; loan contraction 
(1873), 83; unnecessary call on reserve agents (1873), 86; resources and 
liabilities then, 86; New York banks and deposit of checks of, loo-ioi, 

465 



National M on et ar y Commission 

105, 378, 384; increase of reserves during crisis, 147; condition (May, 
July, 1893), 173; purchase of currency at premium (1893), 188; condi- 
tion (1897-1907), 219; condition by sections after crisis of 1907, 307. 
See also Bankers' deposits. 

Covington, Ky., in crisis of 1907, 445. 

Crisis of 1873, preceding economic activity, i; and railroad building, i; 
responsibility of banks for conditions preceding, 2 ; inevitable, 2 ; national- 
bankloans 1869-1873), 2-5; reserves > 1869-1873), 5-15; concentration of 
bankers' deposits, 15-24; New York money market (1872), 24-28; 
stringency April, 1873), 29-31; conditions in New York (August), 32; sud- 
denness, 33; condition of New York banks immediately before, 34; 
outbreak, 35-38; closing of stock exchange, 38-40; government assist- 
ance, 40-42; effect on New York banks, 43-44; clearing-house loan cer- 
tificates and equalizing of reserves in New York, 45-53, 120-123; 
suspension of cash payments in New York, 53-56; currency premium, 
56-58; foreign exchange, 58-61; suspension throughout the country, 
61-68; hoarding, 68-70; end of panic, 70; pay-roll difficulties, 71-75; 
effect on trade, 75-81; bank failures, 81; analysis of banking returns, 
82-89; wise policy of New York banks, 89, 94; importance of equalizing 
reserves, 89; report of New York clearing house on, 90-103; subse- 
quent changes in New York banking practices, 104; legislative results, 
105-107; Secretary Richardson on government and, 321-331; Comptroller 
Knox on, 332-344; Knox on unexpectedness, 338-339; on its causes, 339. 

Crisis of 1884, trade conditions preceding, 108; reserves and silver, 108; 
gold export, 109; failures and fraud in New York, 109-112; causes of 
panic, 112; money stringency, 112; effect on foreign exchange, 112; 
clearing-house loan certificates, 11 2- 114; assistance for suspended bank, 
114; extent of panic, 114, 119; bankers' deposits, 115; domestic exchanges, 
116; inadequacy of reserves, 116; loan contraction, 116; condition of 
New York banks before and after, 11 7-1 19; resulting proposed reforms, 
119; no attempt to equalize reserves, 120, 123; no effect on banking 
practices, 124; Comptroller Cannon on, 345-370; address of G. S. Coe on 
actions during, and needed reforms, 371-379; report of committee of 
clearing house on reforms, 380-386. 

Crisis of 1890, causes, 127, 128, 140, 147; extent, 128; decline of New York 
reserves, 129-133; preceding expansion of call loans, 133-134; con- 
traction and outbreak, 134; unnecessary, 135; government surplus and 
money market conditions, 135-137; Secretary Windom on this, 396-399; 
government assistance, 137-139, 393-396; public opinion on this, 149, 
151; further contraction, 139-140; final phase, stock decline and failures, 
141; clearing-house loan certificates, 142, 143; outside New York, 145; 
no suspension of cash payments, 145; foreign exchange, 146; reasons for 
small effect on bankers' deposits, 148, effect on banking practices, 151- 
152; Comptroller Lacey on use of clearing-house loan certificates, 
387-392- 



466 



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Crisis of 1 893, origin of banking causes, 153; conditions preceding ' 1 89 1 -i 893) , 
154-162, 414; first stage, 162-166; distrust and failure of banks, 166, 
168-170, 175, 210, 212; second stage, 167-175; and silver situation, 168 
169, 179, 208; early issue of clearing-house loan certificates, 170-171; 
reliance on New York banks, 174, 175; third stage, 175-180; conditions 
at time of suspension of cash payments, 177-180; gold import, reason 
for it, 180, 191-194; suspension of cash payments, 180-186; failure to 
equalize reserves, 183-186; currency premium, 186-191; suspension and 
money supply, 195-199; suspension and trade, 199-203; domestic ex- 
changes, 203-208; loan contraction, 208; no subsequent legislation on 
banking methods, 210, 212; conduct of New York banks, 210-212; 
Comptroller Eckels on bank failures and suspensions, 400-405; on 
clearing-house loan certificates, 406-408; report of New York committee 
on clearing-house loan certificates, 409-412; A. D. Noyes on, 413-427. 

Crisis of 1907, no preceding conditions unfavorable to sound banking, 216; 
banking movements ? 1897-1907), 216-224; development of state banks 
and trust companies, 224-227; weaknesses in New York money market, 
influence of trust companies, outside lenders, finance bills, 228-230; 
influence of United States Treasury (1900-1907), 230-232; ultimate 
reserve before the crisis, six New York banks, 232-236; indications 
of economic reaction (1906), 236-239; warnings disregarded, 239; and 
governmental regulation of corporations, 237, 242-244, 274; New York 
stock market (August, 1906-August, 1907), 239-246; "rich men's panic," 
241; distrust of banks, 246, 249, 259; beginning, Heinze-Morse episode, 
246-251; difficulties and relief of New York trust companies, 251-256; 
delay in issue of clearing-house loan certificates, 257; betterment of New 
York conditions, 258; extension over country, 258-260; unnecessary 
New York suspension of cash payments, 260; reasons for suspension, 
condition of New York banks at time, 260-277; unnecessary delay in 
resumption, 277-280, 284; currency premium, 280-282; foreign exchange 
and gold imports, 282-286; interior shipments of money (November), 
285; suspension throughout the country, legal holidays, 286-289, 434- 
437; clearing-house loan certificates outside New York, 289-290, 448; 
pay-roll difficulties, 290; domestic exchanges, 291-297; loan contraction 
throughout the country, 297-300; loan expansion in New York, 300-302; 
conditions influencing business distress, 302 ; effect on all national banks, 
303-307; as to moral cause, 306; effect on country banks 307; on re- 
serve city banks, 308; on banks of Chicago and St. Louis, 309; of New 
York, 310; on six banks of New York, 311; reserves and bankers' de- 
posits of certain central reserve city banks before and after, 312-313; 
expansion of circulation during, 314-316; action of the Treasury, 316- 
318; ineffectual handling of banking situation, 319; report of New York 
committee on use of clearing-house certificates, 428-431; A. P. Andrew 
on currency substitutes, 437-459. 



467 



National Monetary Commission 

Crops, and their movement (1873), t,t,\ shipment during crisis (1873), 60, 
64, 67; movement and crises, 127; in 1889, 1890, 128; export of grain 
(1891), 156, 414. 

Currency, conditions (1869-1873), 5; fixity (1873) and bank reserves, 8, 
50, 96; New York legal-tender reserve (1869-1873), 13-14; release of 
currency by Treasury (1873), 40-42; currency premium (1873), 56-58; 
(1893), 186-191; (1907), 280-282; local substitutes (1873), 75; (1893), 
198; fixity and evils of interest on deposits (1873), 92; and causes of 
crisis of 1873, 103; legislation on legal tenders (1874), 106-107; character 
and amount (189 1-1892), 155-159; increase during crisis of 1893, 184; 
currency premium and money supply (1893), 195-199; increase during 
crisis of 1907, 275, 314-316; Secretary Richardson on legal-tender infla- 
tion (1873), 322; on greater elacticity (1873), 330-331; Secretary Win- 
dom on lack of elacticity (1890), 396-399; A. P. Andrew on currency 
substitutes (1907), 437-459. See also Bank notes. Clearing-house loan 
certificates, Gold, Silver, Suspension. 

D. 

Dallas, cash restriction and currency substitutes (1907), 440, 457. 

Danville, Va., currency substitutes (1907), 447, 451. 

Davenport, Iowa, suspension of cash payments (1873), 66; cash restriction 
and currency substitutes (1907), 440. 

Davison, H. P., and clearing-house loan certificates (1907), 429. 

Dawson, Ga., currency substitutes (1907), 447. 

Dayton, cash restriction (1907), 444. 

Decker, Howell & Co., failure, 142. 

Denver, bank suspensions in crisis of 1893, 175; loans during crisis of 1907, 
300; cash restriction and currency substitutes (1907), 440, 453. 

Deposits of national banks, table (1869-1873), 9, 11-13; of country banks 
during crisis of 1873, 86; of reserve city banks, 87; of New York, 89; New 
York clearing-house committee on receiving checks of out-of-town banks 
as cash, 100-101, 105, 378, 384; of New York banks (1890-1893), 163; 
(January, May, 1892, 1893), 163, 166; reduction during crisis of 1893, 
173. 174; of all banks (1897-1907), 218; of country banks, 219; of St. 
Louis and Chicago, 220; of New York, 221; deposit of government sur- 
plus, 231, 240, 263, 266, 316; condition of New York, just before crisis of 
1907, 245; at time of suspension of cash payments, 261-264; of bankers' 
deposit banks then, 265; of bankers' deposit banks in particular, 267; 
effect of crisis of 1907 on, of all national banks, 305 ; of country banks, 308 ; 
of reserve city banks, 308; of St. Louis and Chicago, 309; of New York, 
310. See also Bankers' deposits, Interest, Reserves. 

Des Moines, cash restriction and currency substitutes (1907), 441, 451. 

Detroit, loans during crisis of 1907, 300; cash restriction and currency sub- 
stitutes (1907), 441; amount of clearing-house loan certificates (1893, 
1907), 449- 

468 



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Dimock & Co., A. W., failure, 112. 

Distrust of banks, in crisis of 1893, 166, 169-170, 175, 181, 210; no evidence 
of,.before crisis of 1907, 246, 249; during the crisis, 259. 

Domestic exchanges, responsibiHty of money centers, 61-62; suspension 
and dislocation of (1873), 73-77; during panic of 1884, 115; during crisis 
of 1893, 203-209, 4.2in.; during crisis of 1907, 291-292; explanation of 
course during crises, 293-297. 

Donnell, Lawson, & Simpson, failure, iii. 

Douglas, Ga., currency substitutes (1907), 447, 450. 

Drew, Daniel, and crisis of 1873, 36. 

Drovers Deposit National Bank, Chicago, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 

Dry-goods trade, and suspension and depression (1873), 77-80. 

Dubuque, suspension of cash payments (1873), 65; in crisis of 1907, 445. 

Duluth, cash restriction and currency substitutes (1907), 441. 

Dunbar, C. F., on redemption of bank notes, 29; on delay in issuing clearing- 
house loan certificates, 49. 

E. 

Eastern States, loans during crisis of 1907, 299; condition of country banks 
after crisis, 308. 

Easton, Pa., cash restriction and currency substitutes (1907), 441, 457. 

Eckels, J. H., on crisis of 1893, 212, 400-408. 

Edwards, R. L., report on clearing-house reforms (1884), 385. 

Elmira, N. Y., in crisis of 1907, 445. 

Equalizing of reserves, in New York (1873), 46; reasons and importance, 
48, 89; report of clearing-house committee on, 94; not done in 1884, 
120, 123; difficulties and evasions in 1873, 120-123; necessity in crises, 
145-146, 185-186, 211, 273; results of failure to resort to, in 1893, 183-185. 

Erie, cash restriction (1907), 444. 

Erie Railroad, receivership (1893), 176. 

Evansville, Ind., cash restriction (1907), 444. 

Everett, J. L., report on clearing-house reforms (1873), 103. 

Exchange. See Domestic, Foreign. 



Failures, financial (1873), 37, 43, 81, 337; (1884), 110-112, 116, 345-349; 
(1890), 142; (1893), 163, 164, 168, 172, 175, 176, 178, 212, 413; com- 
mercial (1893), 202; financial (1907), 252, 259, 274, 275, Comptroller 
Eckels on (1893), 400-405. 

Fall River, cash restriction (1907), 444. 

Fargo, N. Dak., currency substitutes (1907), 447. 

Finance bill of exchange, development, 229; opposition of Bank of Eng- 
land, 241. 

First National Bank, Andersonville, liquidation, 81. 

469 



National Monetary Commission 

First National Bank, Carlisle, liquidation, 8i. 

First National Bank, Chicago, effect of crisis of 1907 on bankers' deposits 
and reserve, 313. 

First National Bank, Mansfield, liquidation, 81. 

First National Bank, New York, and bankers' deposits (1873), 15 w.; effect 
of crisis of 1907 on bankers' deposits and reserve, 232, 313; condition 
at time of suspension of cash payments, 267, 268. 

First National Bank, Norfolk, liquidation, 81. 

First National Bank, Petersburg, liquidation, 81. 

First National Bank, Topeka, liquidation, 81. 

First National Bank, Washington, liquidation, 81. 

First New Orleans National Banking Association, liquidation, 81, over- 
certification of checks, 344. 

Fisk and Hatch, failures, 36, 37, 112. 

Fitchburg, Mass., in crisis of 1907, 445. 

Foreign exchange, during crisis of 1873, 58-61; business, 59; and currency 
premium, 59; blockade and grain shipment, 60; effect of panic of 1884, 
112; during crisis of 1890, 146; in 1892, 157; during crisis of 1893, 170, 
180, 191-194; finance bill, 229; finance bills in 1906, 241; just before 
crisis of 1907, 245; during the crisis, 282; Secretary Richardson on 
question of government purchase (1873), 323-325. See also Gold. 

Fort Dearborn National Bank, Chicago, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 

Fort Wayne, cash restriction and currency substitutes (1907), 441. 

Fort Worth, in crisis of 1907, 445. 

Fourth National Bank, New York, and bankers' deposits (1873), 15 w.; run 
on (1873), 37, 43; effect of crisis of 1907 on bankers' deposits and 
reserve, 313. 

Frew, W. -F., and clearing-house loan certificates (1907), 429. 



Gadsden, Ala., currency substitutes (1907), 447. 

Gaffney, S. C, currency substitutes (1907), 447. 

Gallaudet & Co., P. W., failure, 142. 

Galveston, in crisis of 1907, 444. 

General Electric Company, in crisis of 1893, 176. 

Georgia, in crisis of 1907, 450. 

Gilbert, A., and clearing-house loan certificates (1907), 430. 

Gloucester, Mass., cash restriction (1907), 444. 

Goffe & Randle, failure, 1 1 1. 

Gold, and bank reserves ( 1 869-1873), 6, 9, 14,96; sale by government (1872), 
26, 32; reserves in New York (August, 1873), 32; import during crisis of 
1873, 58; export (1884), 109; (1890), 131, 133, 140; movement (1891-1893), 
154-155. 157. 158; cause of export (1893), 166; export during crisis of 
1893, 167, 170; import during crisis, 180, 183, 426; reason for import, 

470 



Ind 



ex 



191-194; direct import by interior cities, 194, 427M.; import (1906), 240; 

import during crisis of 1907, 283-286; effect of import on Europe, 284; 

increase during crisis, 315. See also Foreign exchange. 
Goldfield, Nev., in crisis of 1907, 259. 
Grain. See Crops. 

Grand Rapids, cash restriction (1907), 444. 
Grant & Ward, failure, no, in. 
Greensboro, N. C, currency substitutes (1907), 447. 
Greenwood, S. C, currency substitutes (1907), 447. 
Gregory & Ballou, suspension, 142. 
Guthrie, Okla., currency substitutes (1907), 447. 

H. 

Hanover National Bank, New York, bankers' deposits, 232; condition at 

time of suspension of cash payments (1907), 267; effect of crisis of 1907 

on bankers' deposits and reserve, 313. 
Harrisburg, suspension of cash payments (1873), 66; cash restriction and 

currency substitutes (1907), 441, 457. 
Hartford, cash restriction (1907), 444. 
Hastings, Nebr., currency substitutes (1907), 447. 
Hatch & Foote, failure, in. 

Hattiesburg, Miss., currency substitute (1907), 447. 
Haverhill, Mass., in crisis of 1907, 445. 
Heinze, F. A., and beginning of crisis of 1907, 247. 
Henderson, Ky., currency substitutes (1907), 447. 
Hepburn, A. B., and clearing-house loan certificates (1907), 430. 
Hoarding, extent, during crisis of 1873, 68-70; during crisis of 1893, 195; 

198-199; A. P. Noyes on (1893), 423, 425-426, 426 ». 
Holyoke, Mass., in crisis of 1907, 445. 
Hotchkiss, Burnham & Co., failure, in. 

Houston, cash restriction and currency substitutes (1907), 441. 
Howard & Co., E., pay-roll difficulties (1873), 72. 
Hoyt, Sprague & Co., suspension, 79, 80. 

I. 

Importers and Traders National Bank, New York, and bankers' deposits 
(1873), 15 M.; effect of crisis of 1907 on bankers' deposits and reserve, 313. 

Indiana, official encouragement of suspension of cash payments (1907), 435. 

Indianapolis, suspension of cash payments (1873), 65; in crisis of 1893, 
176, 177; cash restriction and currency substitutes (1907), 287, 441; 
loans during crisis of 1907, 299. 

Interest on bankers' and other deposits, 20; evil effects, 21-24, and call 
loans, 24, 27, 30, 92; condemned in New York clearing-house reports, 
91-95, 119, 120, 375-378, 381-383, 385; probable effect on reserves of 



471 



National M on et ar y Commission 

abandonment, 97, 376-377, 383; practice continued, 104; Secretary 

Richardson on (1873), 321, 327-330; Comptroller Knox on (1873), 342- 

344; Comptroller Cannon on (1884), 367-370. 
Iowa, oflScial encouragement of suspension of cash payments (1907), 437. 
Iron River, Mich., currency substitutes (1907), 447. 
Irving National Exchange Bank, New York, effect of crisis of 1907 on 

bankers* deposits and reserve, 313. 



Jackson, Ga., currency substitutes (1907), 447. 

Jackson, Mich., in crisis of 1907, 445. 

Jacksonville, Fla., in crisis of 1907, 445. 

Jenkins, W. L., report on clearing-house reforms (1873), 103; (1884), 385. 

Johnstown, Pa., pay-roll difficulties (1873), 73; in crisis of 1907, 445; 

Joliet, cash restriction and currency substitutes (1907), 441, 457. 

Jones, J. L., and crisis of 1907, 436. 

Jones, J. Q., report on clearing-house reforms (1873), 103. 

Joplin, Mo., cash restriction and currency substitutes (1907), 441. 

K. 

Kalamazoo, currency substitutes (1907), 447. 

Kansas City, suspension of cash payments (1873), 66; exchange on New 
York (1893), 205; (1907), 292; in crisis of 1907, 274; loan contraction 
during crisis, 299, 300; cash restriction and currency substitutes, 441. 

Kenyon, Cox & Co., failure, 35, 36. 

Key West, currency substitutes (1907), 447. 

Knickerbocker Trust Company, New York, suspension, 251-253. 

Knox, J. J., on crisis of 1873, 81, 332-344; report on clearing-house re- 
forms (1884), 385. 

Knoxville, suspension of cash payments (1873), 66; cash restriction and 
currency substitutes (1907), 441, 451. 

L. 

Lacey, E. S., on clearing-house loan certificates (1890), 387-392, 
La Crosse, Wis., in crisis of 1907, 445. 
Lancaster, Pa., in crisis of 1907, 445. 

Las Vegas, N. Mex., currency substitutes (1907), 447, 451. 
Leavenworth, Kans., suspension of cash payments (1873), 66. 
Legal holidays during crisis of 1907, 286, 434. 
Legal tenders. See Currency. 

Legislation, effect of crisis of 1873, 105-107; of crisis of 1893, 210. 
Lexington, Ky., cash restriction and currency substitutes (1907), 441, 457. 
Liberty National Bank, New York, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 



472 



Ind 



ex 



Lincoln, cash restriction and currency substitutes (1907), 441. 

Lincoln Trust Company, New York, run on, 254. 

Little Rock, cash restriction and currency substitutes (1907), 441. 

Loans, national-bank, expansion and unsound business conditions before 
crisis of 1873, 3-4; conditions (1869-1873), 4-5; of bankers' deposit and 
other New York banks (1869-1873), 17; influence on, of payment of inter- 
est on deposits, 21-24; call loans and interest on deposits, 24, 27, 30, 92, 
328, 368; New York market (1872), 25-28; contraction during crisis of 
1873, 44-451 52-53, 83; resumption after issue of clearing-house loan 
certificates, 53, 60; contraction of call loans, 84; call loans not liquid in 
emergency, 84, 93, 301 ; what loans then liquid, 85 , primary object of 
liquid assets, 85; limitation recommended by clearing-house committee 
(1873), 97; rates for call loans during panic of 1884, 110-112, 117; for 
commercial paper, 113; contraction during panic of 1884, 116; of out-of- 
town banks in New York, 118, 148, 228; fluctuation in rates for call loans 
(1890), 130, 132, 138, 144, 144M., 145; expansion of call loans (August, 
1890), 133-134; attempted contraction and crisis, 134, 139-140; expan- 
sion in crisis recommended, 143-144; amount (1891-1893), 157, 159, 
160; character (1891-1893), 161; and silver, 161; of New York banks 
(January-March, 1892-1893), 163-164; New York, during crisis of 1893, 
172; general conditions during crisis, 173, 174; New York call loans 
during crisis, 177; New York time and commercial paper, 177; contrac- 
tion during crisis, 208; inadequate lending power during crises, 216; of 
all national banks (1897-1907), 218; of New York banks (1897-1907), 
221, 222; influence of trust companies on New York market, 227, 228; 
increasing difficulty in liquidating (1906), 238, 240; contraction (March, 
1907), 241, of New York banks just before crisis of 1907, 245; at time 
of suspension of cash payments, 261-262; of bankers' deposit banks then, 
265; of bankers' deposit banks in particular, 267, 268; New York con- 
ditions before and after crisis, 269-271, 309; contraction throughout the 
country during crisis, 297-301; why expansion in New York during 
crisis, 300; shifting of call loans during crisis, 302; regular customers not 
pressed by banks during crises, 303; growing need of reserve of lending 
power, 303, 319; effect of crisis on, in all national banks (1907), 304; in 
country banks, 308; in reserve city banks, 308; in St. Louis and Chicago, 
309, Comptroller Knoxon call loans (1873), 333-334, 337, 340; Comptroller 
Cannon on governmental oversight (1884), 364; A. D. Noyes on expan- 
sion during crisis of 1893, 418-421. 

Lockwood & Co., suspension, 30. 

Los Angeles, cash restriction and currency substitutes (1907), 441, 457. 

Louisville, suspension of cash payments (1873), 66; failures during crisis 
of 1893, 176, 177; cash restriction and currency substitutes (1907), 441. 

Low, A. A., on policy of loan expansion in crisis, 143. 

Lowell, Mass., suspension of cash payments (1873), 66; in crisis of 1907, 445. 

Lynchburg, Va., currency substitutes (1907), 447. 

Lynn, cash restriction and currency substitutes (1907), 441. 

473 



National Monetary Commission 



M. 

McGarrah, G. W., and clearing-house loans certificates (1907), 429. 

McKeesport, Pa., cash restriction (1907), 444. 

Macon, Ga., currency substitutes (1907), 447. 

Manchester, N. H., in crisis of 1907, 445. 

Manufacturing, excessive production before 1873, i, 339; pay-roll diffi- 
culties (1873), 71-75; (1893), 200, 202; (1907), 290; curtailment follow- 
ing crisis of 1873, 74; depression after crisis, 79-81; decline before 1884, 
108. See also Trade. 

Marine National Bank, New York, failure, no, in, 345-348, 350, 357. 

Mechanics-American National Bank, St. Louis, effect of crisis of 1907 on 
bankers' deposits and reserve, 313. 

Mechanics and Traders Bank, New York, and crisis of 1907, 248. 

Mechanics National Bank, New York, effect of crisis of 1907 on bankers* 
deposits and reserve, 313. 

Memphis, cash restriction and currency substitutes (1907), 441, 453. 

Mercantilfe National Bank, New York, and crisis of 1907, 247. 

Merchants Laclede National Bank, St. Louis, effect of crisis of 1907 on 
bankers' deposits and reserve, 313. 

Merchants National Bank, New York, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 

Merchants' National Bank, Petersburg, liquidation, 81. 

Metropolitan National Bank, New York, suspension, iii, 112, 348-349; 
assistance from clearing house, 114, 352, 372. 

Middle Western States, loans during crisis of 1907, 300; condition of coun- 
try banks after crisis, 308. 

Milledgeville, Ga., currency substitutes (1907), 447. 

Mills, Robeson & Smith, failure, 142. 

Milwaukee, bank failures (1893), 176, 177; loans during crisis of 1907, 300; 
cash restriction and currency substitutes (1907), 441, 452. 

Minneapolis, exchange on New York (1893), 205; loans during crisis of 
1907, 300; cash restriction and currency substitutes (1907), 441. 

Mobile, cash restriction (1907), 444. 

Money. See Bank notes, Circulation, Gold, Silver, Suspension. 

Montgomery, Ala., cash restriction and currency substitutes (1907), 
441,452. 

Morgan, J. P., on loan expansion during crisis, 143; and crisis of 1907, 

255. 256. 
Morrison, J. M., report on clearing-house reforms, 103. 
Morse, C. F., speculation and crisis of 1907, 248. 
Muskogee, Okla., currency substitutes (1907), 447, 453. 



474 



Ind 



ex 



N. 



Nash, W. A., and clearing-house loan certificates (1893), 410-412; (1907), 

430. 
Nashville, suspension of cash payments (1873), 65; cash restriction and 

currency substitutes (1907), 441. 
Nation, The, on control of banks (1907), 250. 
National Bank of Commerce, Kansas City, suspension, 274. 
National Bank of Commerce, New York, as bankers' deposit bank, 232 ; and 

Knickerbocker Trust Company, 251; condition at time of suspension of 

cash payments, 267, 268; effect of crisis of 1907 on bankers' deposits and 

reserve, 313. 
National Bank of Commerce, St. Louis, effect of crisis of 1907 on bankers' 

deposits and reserve, 313. 
National Bank of North America, New York, and crisis of 1907, 248. 
National Bank of the Commonwealth, New York, failure, 37, 43, 52, 337, 

344; liquidation, 81. 
National banks. See Central reserve. Country, Crisis, Reserve city. 
National City Bank, New York, effect of crisis of 1907 on bankers' deposits 

and reserve, 313. 
National Cordage Company, failure, 164. 
National Live Stock Bank, Chicago, effect of crisis of 1907 on bankers' 

deposits and reserve, 313. 
National Park Bank, New York, and bankers' deposits (1873), 15 w.; (1907), 

232; condition at time of suspension of cash payments (1907), 267; 

effect of crisis on bankers' deposits and reserve, 313. 
Nevada, legal holidays during crisis of 1907, 286, 435. 
Newark Savings Institution, failure, 112. 
New Bedford, Mass., in crisis of 1907, 445. 
New Britain, Conn., in crisis of 1907, 445. 
Newburgh, N. Y., pay-roll difficulties (1873), 73. 
New CarHsle, Ind., currency substitutes (1907), 447. 
New Castle, Pa., in crisis of 1907, 445. 
New England, loan expansion during crisis of 1907, 299; condition of 

country banks after crisis, 308. 
New Haven, cash restriction (1907), 444. 
Newnan, Ga., currency substitutes (1907), 447. 
New Orleans, clearing-house loan certificates (1873), 62; suspension of cash 

payments (1873) 63; exchange on New York (1893), 205; (1907), 292; 

closing of stock exchange (1907), 259«; loans during crisis, 299; cash 

restriction and currency substitutes, 442, 457; amount of clearing-house 

loan certificates (1893, 1907), 449. 
Newport, Ky., in crisis of 1907, 445. 
New York City, failure of bond issue (1907), 242. See also next title. 



6158—10 31 475 



National Monetary Commission 

New York City banks, importance and responsibility as central reserve city, 
13. 15. 103, 126, 174, 175, 274, 306-307, 373, 374, 382; responsibility as 
to domestic exchanges, 61-62; effect on, of increase in central reserve 
cities, 125-127; development of trust companies, 225-228; need of reserve 
of lending power for emergencies, 303, 319; cash restriction and currency 
substitutes (1907), 442. See also Bankers' deposits, Clearing House, 
Clearing-house loan certificates. Crisis, Deposits, Domestic exchanges. 
Equalization, Foreign exchange, Interest, Loans, Reserves, Stock ex- 
change. Suspension. 

New York Warehouse and Security Company, failure, 35, 36, 337. 

Ninth National Bank, New York, and bankers' deposits, 15 n. 

Norfolk, Va., in crisis of 1907, 445. 

North River Bank, New York, failure, 142. 

Northern Pacific Railroad, and crisis of 1873, 36. 

Northwestern Car Company, receivership, in. 

Noyes, A. D., on crisis of 1893, 413-427. 

O. 

Oakland, Cal., cash restriction and currency substitutes (1907), 442. 

Ogden, Utah, currency substitutes (1907), 447. 

Oklahoma, legal holidays during crisis of 1907, 286; official encouragement 
to suspension, 437. 

Oklahoma, Okla., currency substitutes (1907), 447. 

Omaha, during crisis of 1893, 203; loans during crisis of 1907, 300; cash re- 
striction and currency substitutes 1 1907), 442, 453. 

Oregon, legal holidays during crisis of 1907, 286, 435. 

Oshkosh, cash restriction (1907), 444. 

Overcertification of checks for brokers, in New York (1873), 38; clearing- 
house committee on this, 97-99, loi, 379, 384; forbidden by law, 104; 
effect of stock exchange clearing house on, 104, 152, 358, 379, 384; 
Comptroller Cannon on dangers (1884), 119, 346, 353-359; Comptroller 
Knox on (1873), 344. 

P. 

Pacific coast, and crisis of 1873, 67; loans during crisis of 1907, 300; condi- 
tion of country banks after crisis, 308. 
Palmer, F. A., report on clearing-house reforms (1884), 385. 
Panama bonds, issue during crisis of 1907, 316. 
Panics. See Crisis. 
Paterson, N. J., in crisis of 1907, 445. 
Paton & Co., suspension, 78. 
Pawtucket, cash restriction (1907), 444. 
Pay checks, use as currency (1907), 455-456, 458. 
Pay-roll difficulties during crisis (1873), 71-75; (1893), 200, 202. 
Peake, Opdycke & Co., suspension, 78, 80. 

476 



Index 

Pennsylvania Bank, Pittsburg, failure, ii6. 

Peoria, cash restriction and currency substitutes (1907), 442. 

Perkins, E. H., Jr., and clearing-house loan certificates (1893), 410-412. 

Philadelphia, clearing-house loan certificates (1873), 62; (1884), 145; (1890), 
390-392; (1893), 408, 420; suspension of cash payments (1873), 65; pay- 
roll difficulties (1873), 73; exchange on New York during crisis (1893), 
204; (1907), 291, 295; loans during crisis of 1907, 299; cash restriction 
and currency substitutes (1907), 449. 

Philadelphia and Reading Railroad, failure, 163, 164. 

Pittsburg, pay-roll difficulties (1873), 72, 73; closing of stock exchange 
(1907), 259; loans during crisis of 1907, 299; clearing-house loan certifi- 
cates (1893, 1907), 408, 449; cash restriction and currency substitutes 
(1907), 442, 455-458. 

Pittston and Elmira Coal Company, pay-roll difficulties, 73. 

Pooling of currency. See Equalizing of reserves. 

Portland, Me., in crisis of 1907, 445. 

Portland, Oreg., cash restriction and currency substitutes (1907), 289, 442, 
451 ; loans during crisis, 300. 

Potts, G. H., report on clearing-house reforms (1884), 385. 

Price, wheat during crisis of 1873, 61 ; cotton, 61 ; steel rails (1883), 108. 

Produce exchange, New York, and crisis of 1873, 323; and overcertifica- 
tion of checks, 359. 

Production. See Crops, Manufacturing. 

Providence, R. I., suspension of cash payments (1873), 65; pay-roll diffi- 
culties (1873), 74; in crisis of 1907, 259; cash restriction and currency 
substitutes (1907), 442. 

Q. 

Quincy, 111., in crisis of 1907, 445. 

R. 

Racine, Wis., cash restriction and currency substitutes (1907), 442. 

Railroads, and cause of crisis of 1873, i, 35, 36, 339; effect of crisis on freight, 
76; and crisis of 1893, 154, 176; effect of crisis on gross earnings, 201. 

Randall & Wierum, suspension, 142. 

Reading, Pa., cash restriction (1907), 444. 

Redemption banks. See Reserve city. Central reserve. 

Rediscounting during crises, 148, 312, 420. 

Remington gun factory, pay-roll difficulties (1873), 73. 

Reserve city banks, original purpose, 1 1 ; legal requirements as to reserves, 
12; condition (1869-1873), 12; condition (September-November, 1873), 
83, 87 ; loan contraction during panic, 83 ; reliance on New York deposits, 
88; law of 1887, 124; condition (May, June, 1893), 173; condition 
(1897-1907), 220; effect of crisis of 1907 on, 308. 



477 



National Mo net ary Commission 

Reserves of national banks, conditions (1869-1873), 5-24; specie as, then, 
6; specie in New York, 7, 14; and fixity of legal tenders, 8; against de- 
posits and bank notes, 9; table (1869-1873) of liabilities and, 9; con- 
ditions governing proper amount, 10; effect of increased number of 
banks on efficiency (1873), 10; legal requirement of country banks, 11; 
condition of country bank (1869-1873), 11; legal requirement of reserve 
city banks, 12; condition of reserve city bank (1869-1873), 12; impor- 
tance of New York banks, their condition (1869-1873), 13-15; condi- 
tion of bankers' deposit and other New York banks (1869-1873), 17-18; 
dependence on New York, 19, 27, 126; effect on, of payment of interest on 
deposits, 21-25, 93; need of strengthening in New York (June, 1873), 31; 
condition (August, September), 32, 34; general inadequacy of New York, 
33, 211, 216, 234-235; policy as to, in New York in 1873 and later crises, 
55-56; inadequate, in New York as cause of general suspension (1873), 
68; and loans during crisis of 1873, 85; in country banks during crisis, 
86; in reserve city banks, 87; in New York, 88, 94; clearing-house com- 
mittee on necessity of "legal reserve," 95-97, loi ; varieties of money in 
(1873), 96; responsibility of system for crisis of 1873, 103; effect on, of 
legislation of 1874, 105-107; effect of silver dollars (1883), 108; inade- 
quacy of New York (1884), 116; small decline during panic of 1884 ex- 
plained, 118; decline of New York (1890), 129-133; attempt to pre- 
serve surplus, causes unnecessary crisis (1884), 134; inadequacy as 
cause of crisis of 1890, 141, 150; as unused asset in emergencies, 147, 151, 
279; increase in country bank, during crises, 147; enforcement on state 
banks of clearing-house's requirement, 151; of New York banks at 
beginning of crisis of 1893, 153; amount and character (1891-1893), 
154-156, 158, 159, 160, 161; in New York (January-June, 1892, 1893), 163, 
164, 167, 168; New York, during crisis of 1893, 172, 173, 177, 181, 182; 
general, during crisis, 173, 174; increase of New York, after suspension, 
189-191; recovery after crisis, 209; of all national banks (1897-1907), 
217-219; of country banks, 219-220; of St. Louis and Chicago, 220; of 
New York, 221; inadequate, of state banks and trust companies, 226; New 
York, and development of trust companies, 227, 236; influence of gov- 
ernment surplus and deposit, 232; condition of ultimate reserve before 
crisis of 1907, 232-236; New York, before crisis, 245; at time of sus- 
pension of cash payments, 261-264; of bankers' deposit banks then, 264; 
of bankers' deposit banks in particular, 267; effect of crisis on, in all 
national banks, 304; in country banks, 307; in reserve city banks, 308; 
in St. Louis and Chicago, 309; in New York, 310; in six bankers' deposit 
banks there, 311; in chief bankers' deposit banks of central reserve cities, 
312-313; increase after crisis, 318; Secretary Richardson on use in 
emergencies, 331; Comptroller Knox on this, 334-336. See also De- 
posits, Equalizing of reserves. 

Resumption of specie payments. Secretary Richardson on (1873), 331. 

"Rich men's panic" (1907), 241. 



478 



Ind 



ex 



Richardson, W. A., on crisis of 1873, 321-331. 

Richmond, David, failure, 142. 

Richmond, in crisis of 1907, 444, 453. 

Robinson & Co., Nelson, failure, iii. 

Rochester, pay-roll difficulties (1873), 73; in crisis of 1907, 445. 

Rockford, 111., in crisis of 1907, 445. 

Rome, Ga., currency substitutes (1907), 447. 

S. 

Sabin, D. M., and Northwestern Car Company, in. 

Sacramento, cash restriction and currency substitutes (1907), 442. 

Saginaw, cash restriction (1907), 444. 

St. Joseph, cash restriction and currency substitutes (1907), 442. 

St. Louis, clearing-house loan certificates (1873), 62; suspension of cash 
payrrients (1873), 64; pay-roll difficulties (1873), 72; as central reserve 
city, 124-127, 175; condition of banks (May, July, 1893), 173; exchange 
on New York (1893), 204; (1907), 291; condition of banks (1897-1907), 
220; bankers' deposits (1897-1907), 223; effect on banks of crisis of 
1907, 309; effect on chief bankers' deposit banks, 313; cash restriction 
and currency substitutes (1907), 442, 453. 

St. Paul, cash restriction and currency substitutes (1907), 287, 442; loans 
during crisis, 300. 

Salem, Mass., in crisis of 1907, 445. 

Salt Lake City, cash restriction and currency substitutes (1907), 442. 

San Antonio, cash restriction and currency substitutes (1907), 443. 

San Francisco, exchange on New York (1893), 205; in crisis of 1907, 274; 
loans during crisis, 299, 300; cash restriction and currency substitutes, 

443, 458. 

Savannah, suspension of cash payments (1873), 63; loans during crisis of 
1907, 299; cash restriction and currency substitutes, 443. 

Savings banks, in crisis of 1873, 42, 51, 69, 329; in crisis of 1893, 180; in 
crisis of 1907, 256, 258. 

Schenectady, in crisis of 1907, 445. 

Scranton, in crisis of 1907, 445. 

Seaboard National Bank, New York, effect of crisis of 1907 on bankers' 
deposits and reserve, 313. 

Seattle, loans during crisis of 1907, 300; cash restriction and currency sub- 
stitutes, 443, 451. 

Second National Bank, New York, defalcation of president, iio-iii, 112, 

"4, 349-350. 
Secretary of the Treasury. See Cortelyou, Richardson, United States 

Treasury, Windom. 
Securities, American, distrust in Europe (1883), 109; London sales and 

decline (1890), 131, 140; (1891-1893), 157, 158; foreign purchase during 

crisis of 1893, 179; foreign sale (1907), 245. 

479 



National Monetary Commission 

Sedalia, Mo., currency substitutes (1907), 447. 

Shaw, L. M., policy of deposit of government surplus, 231. 

Silver, effect on bank reserves (1883), 108; Sherman law and gold exports 
(1891), 154-155; and increase in circulation (1891-1893), 155, 158; and 
loans (1891-1893), 161; and conditions preceding crisis of 1893, 162; 
and the crisis, 165, 168, 169, 179, 208; increased circulation during crisis 
of 1907, 316. 

Simmons, J. E., and clearing-house loan certificates (1893), 410-412. 

Sioux City, cash restriction and currency substitutes (1907), 443. 

Sioux Falls, in crisis of 1907, 436. 

Smith, A. H., forgeries, 142. 

South Bend, cash restriction and currency substitutes (1907), 443, 452. 

South Boston, Va., currency substitutes (1907), 447, 450. 

Southern Pacific Railroad, dividend (1906), 239. 

Southern States, loans during crisis of 1907, 299; condition of country 
banks after crisis, 308. 

Specie. See Gold, Silver. 

Spokane, cash restriction and currency substitutes (1907), 443, 431. 

Sprague, A. and W., suspension, 79, 80. 

Springfield, 111., in crisis of 1907, 445. 

Springfield, Mass., cash restriction (1907), 444. 

Springfield, Ohio, in crisis of 1907, 445. 

Squire & Co., J. P., pay-roll difficulties (1873), 72. 

Standard Oil Company, fine (1907), 243. 

State banks, and reserve requirements, 151; conditions unimportant in 
crises before 1907, 224; growth (1897- 1907), 225; deposits with national 
banks, 225; result of lack of branches, 249. 

Statistics. See Tables. 

Stock exchange of New York, call loans and interest on bankers' deposits, 
24, 27, 30, 92, 328, 368; in crisis of 1873, 37; closed, 38-40, 337; tem- 
porary overdrafts, 38, 97-99, loi, 104, 119, 344, 379, 384; clearing house 
for, 104, 152, 358, 379, 384; failures and fraud (1884), 109-112; market 
in 1891, 156; in 1892, 160; during crisis of 1893, 176, 179; movements 
(1906), 239; panic (March, 1907), 241; continued sensitiveness, 242, 244; 
during crisis of 1907, 256; closing of Pittsburg and New Orleans, 259; 
Comptroller Knox on (1873), 340-341. 

Superior, Wis., cash restriction and currency substitutes (1907), 443, 453. 

Surplus. See United States Treasury. 

Suspension of cash payments, and issue of clearing-house loan certificates, 
48, 63, 123, 145, 171, 181, 213-215, 260, 272, 273; in New York (1873), 
53-56, 76; currency premium (1873), 56-58; (1893), 186-188; (1907), 
280-282; throughout the country (1873), responsibility of New York for, 
61-68; and hoarding, 68; period of disturbing influence, 70; and pay- 
roll difficulties, 71-75; and domestic exchanges, 75-77; none in 1890, 
145-146; condition of New York banks at time of (1893), 177-180; 

480 



Index 

reason for, in New York, i8i; justification considered, 183-186; com- 
pleteness, 186; reason for disappearance of currency premiums (1893), 
189; unduly prolonged, 190; currency premium and gold imports, 191- 
194; premium and domestic money supply, 195; general (1893), 196; 
effect on trade, 199-203; unnecessary resort to, in crisis of 1907, 260, 276; 
condition of New York banks when resorted to, 261; attitude of New 
York banks as to, 273; as evidence of its own necessity, 275; unduly 
prolonged, 278, 284; table of New York reserves during, 279; through- 
out the country, legal holidays, 286-289, 434; and trade depression, 298; 
fear of, as cause of crisis, 319; A. D. Noyes on (1893), 421-427, A. P. 
Andrew on official encouragement to (1907), 434-437. Set also Circula- 
tion. 

Sylvester, Ga., currency substitutes (1907), 447. 

Syracuse, cash restriction (1907), 444. 



Tables, condition of all national banks (i 869-1 873), 4; reserves and liabil- 
ities (1869-1873), 9; condition of country banks (1869-1873), ir; of 
reserve city banks, 12; of New York banks, 13; of bankers' deposit and 
other New York banks, 17; fluctuation of bankers' deposits (1871- 
1872), 19; movement of loans, deposits, reserves, in New York (1872)1 
22; loans of bankers' deposit and other New York banks, 23; with- 
drawal of bankers' deposits (1872), 27; condition of bankers' deposit 
and other New York banks (August-September, 1873), 34; condi- 
tion of New York banks (Sept. 20, 1873), 44; (Sept. 26), 52; (Sept. 
27-Nov. 8), 55; currency premium (1873), 57; (1893), 187; (1907), 
280-282; bank liquidation after crisis of 1873, 81; national bank 
returns by classes (Sept. 12, Oct. 13, Nov. i, 1873), 83; resources 
and Habilities of country banks then, 86; of reserve city banks, 
87; of New York banks, 88; condition of New York banks before 
and after crisis of 1884, 117; condition of New York banks (June 
28-Aug. 9, 1890), 132; (Aug. 9-Sept. 27), 138; (Nov. i-Dec. 15), 
145; (January-May, 1892, 1893), 163; (May 27, 1892, 1893), 167; 
condition of national banks by classes (May, July, 1893), 173; con- 
dition of New York banks (July 29-Sept. 9, 1893), 190 w.; railroad 
gross receipts (1892, 1893), 201; domestic exchanges (1893), 204-205; 
condition of all national banks (1897-1907), 218; of New York 
banks, 221; state bankers' deposits, 225; condition of bankers' deposit 
and other New York banks (August, 1907), 233; condition of New York 
banks just before crisis (1907), 245; at time of suspension of cash pay- 
ments, 261-263; of bankers' deposit banks then, 265; of these banks in 
particular, 267; New York reserves during suspension, 279; money ship- 
ments to interior (November, 1907), 285; domestic exchanges (1907), 
291-292; loan contraction throughout country during crisis, 299; New 
York loans by classes during crisis, 301 ; effect of crisis on all national 

481 



National Monetary Commission 

banks, 305; on country banks, 308; on reserve city banks, 308; on St. 
Louis and Chicago, 309; on New York, 310; on bankers' deposits and 
reserves of certain banks in central reserve cities, 312-313; increase in 
money supply (August-December, 1907), 315; clearing-house loan certifi- 
cates (1884), 353; (1893), 408; (1860-1907), 432-433; (f893, 1907), 449; 
government bond purchases (i 888-1 890), 395; balances paid by New 
York clearing-house loan certificates (1907), 431; cash restrictions and 
currency substitutes (1907), 440-443, 447-448, 458. 

Tacoma, cash restriction and currency substitutes (1907), 443. 

Tampa, currency substitutes (1907), 447. 

Tappen, F. D., and stock exchange (1873), 46; report on clearing-house 
reforms (1873), 103; and clearing-house loan certificates (1893), 410-412. 

Taunton, Mass., suspension of cash payments (1873), 72; cash restriction 
and currency substitutes (1907), 443. 

Taylor, Moses, report on clearing-house reforms, 103. 

Terre Haute, in crisis of 1907, 445. 

Third National Bank, St. Louis, effect of crisis of 1907 on bankers' deposits 
and reserve, 313. 

Third National Bank, New York, and bankers' deposits (1873), 15 ». 

Thomas, E. R. and O. F., and beginning of crisis of 1907, 248. 

Thomaston, Ga., currency substitutes (1907), 447. 

Thomasville, Ga., currency substitutes (1907), 447. 

Tifton, Ga., currency substitutes (1907), 447, 450. 

Toledo, pay-roll difficulties (1873), 72; in crisis of 1907, 445. 

Topeka, cash restriction and currency substitutes (1907), 443, 451, 457. 

Townsend, Edward, and clearing-house loan certificates (1907), 430. 

Trade, effect of suspension of cash payments (1873) and development of 
depression, 75-81; favorable balance (1890), 128; foreign (1891-1892), 
155-157; mercantile failures (1893), 169; commercial paper during crisis 
of 1893, 177; conditions during crisis of 1893, 199; pay-roll difficulties, 200, 
202, 290; foreshadowed reaction (1906), 237-239; warnings disregarded, 
239; general condition at time of crisis of 1907, 274; mercantile failures 
during crisis, 275; foreign, during 1907, 283; conditions influencing 
depression during crisis, 298, 302. See also Domestic exchange. Foreign 
exchange. Manufacturing. 

Treasury. See United States Treasury. 

Trenton, in crisis of 1907, 445. 

Trust companies, deposits with national banks, 225; inadequate reserves, 
226, 236; development in New York, 227; in crisis of 1907, 251-256; 
attitude of clearing house toward, 252-254, lack of organization, 253; 
G. S. Coe on (1884), 378. 

Trust Company of America, New York, run on, 253. 

Troy, N.'Y., in crisis of 1907, 445. 



482 



Ind 



ex 



u. 

Union Pacific Railroad, dividend (1906), 239; decline in shares (1907), 241. 

Union Trust Company, run on, 37; suspension, 37; failure, 43, 337. 

United States Steel Corporation, dividend on common stock (1906), 239. 

United States Treasury, relief afforded by (1872, 1873), 26, 321; receipts and 
payments at New York (September, 1873), 41 n. ; purchases bonds (1873)' 
40, 326; refuses to inflate currency, 41, 322; surplus (1889) and purchase 
of bonds, 135; surplus and money market conditions (1890), 136; bond 
purchases during crisis of 1890, 137-139, 393-396; reliance on, for money 
(1890), 147; public opinion on relief by, 149-151; excess payments 
during crisis of 1893, 184; policy of deposit of surplus, 231; deposits 
(1906), 240; deposits during crisis of 1907, 263, 266, 316; Secretary 
Richardson on, and crisis of 1873, 321-331; Secretary Windom on, and 
crisis of 1890, 393-399; Windom on surplus and crises, 396-398. 

Utica, N. Y., pay-roll difficulties (1873), 73; in crisis of 1907, 445. 

V. 

Valdosta, Ga., currency substitutes (1907), 447. 
Vicksburg, currency substitutes (1907), 448. 
Virginia, Minn., currency substitutes (1907), 448. 

W. 

Walcott & Co., J. C, suspension, 142. 

Walker, Amasa, on bankers' deposits, 415. 

Wall Street National Bank, New York, overcertification of checks, 355. 

Washington, D. C, clearing-house loan certificates (1873), 62; in crisis of 

1907, 445- 
Washington, State of, legal holidays during crisis of 1907, 286. 
Waterbury, Conn., in crisis of 1907, 445. 
Waycross, Ga., currency substitutes (1907), 448. 
Wesley, E. B., receiver of Union Trust Company, 37. 
Western States, loans during crisis of 1907, 300; condition of country 

banks after crisis, 308. 
Westinghouse Company receivership (1907), 259. 
Wheeling, cash restriction and currency substitutes 1907), 443. 
Whitney & Co., C. M., failure, 142. 

Wichita, cash restriction and currency substitutes ( 1907), 443. 
Wiggin, A. H., and clearing-house loan certificates ( 1907), 429. 
Wilkes-Barre, in crisis of 1907, 445. 
Willacoochee, Ga., currency substitutes ( 1907), 448. 
Williams, G. W., and clearing-house loan certificates (1893), 409-412. 
Williams, J. C, failure, iii. 

Williams, J. E., report on clearing-house reforms ( 1873), 103. 
Williamsport, Pa., in crisis of 1907, 445. 

483 



National M on et ar y Commission 

Wilmington, Del., cash restriction and currency substitutes (1907), 443. 

Winston-Salem, N. C, currency substitutes (1907), 448, 454. 

Woodward, J. T., report on clearing-house reforms (1884), 385; and clear- 
ing-house loan certificates (1907), 430. 

Woonsocket, R. I., cash restriction 1907), 444. 

Worcester, Mass., suspension of cash payments (1873), 66; in crisis of 1907, 
445- 

Y. 

Yonkers, in crisis of 1907, 445. 

York, Pa., cash restriction (1907), 444. 

Youngstown, cash restriction and currency substitutes (1907), 443, 452. 



■9 



484 



LB N 10 



